A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength ratings (FSR) of ‘A+’ (Superior) and issuer credit ratings (ICR) of “aa” of the North America property/casualty subsidiaries of ACE Limited, which is domiciled in Zurich, Switzerland, including, ACE Bermuda Insurance Ltd., ACE Tempest Reinsurance Ltd. – both domiciled in Bermuda – as well as the members of the ACE American Pool and ACE INA Insurance (Canada).
In a separate bulletin A.M. Best Europe revised the outlook to positive from stable and affirmed the financial strength rating of ‘A+’ (Superior) and the issuer credit rating of “aa” of ACE European Group Limited.
Best has also revised the outlook to positive from stable and affirmed the FSR of ‘A+’ (Superior) and ICR of “aa” of ACE Tempest Re’s parent, ACE Tempest Life Reinsurance Ltd (ATLRE and has revised the outlook to positive from stable and affirmed the ICR and senior debt ratings of “a” of ACE and its wholly owned downstream holding company, ACE INA Holdings Inc., whose debt is fully guaranteed by ACE.
In addition, Best has upgraded the FSR to ‘A+’ (Superior) from ‘A’ (Excellent) and the ICR to “aa-” from “a+” of Combined Insurance Company of America, based in Glenview, Illinois, and Combined Life Insurance Company of New York (Combined companies). Additionally, Best has affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of ACE Life Insurance Company, based in Stamford, Conn. The rating outlook for these life and health companies is stable.
The ratings for ACE’s core property/casualty operations “reflect their strong risk-adjusted capitalization, diversified global operation enhanced by prudent acquisitions over the past few years and historically favorable record of generating strong earnings and cash flows,” Best explained.
“ACE’s core property/casualty operations’ balance sheet is strengthened by controlled financial leverage, a relatively conservative investment portfolio that generates stable earnings and favorable loss reserve development in recent years.
“The positive rating factors are derived from management’s experience and consistent focus on underwriting profitability generated by effective risk selection and pricing standards, and maintenance of appropriate policy limits and exposure to catastrophes, including the use of reinsurance to manage net retentions.
“ACE’s strong enterprise risk management (ERM) program relies on close collaboration of executives and operating departments to identify, assess and control enterprise risk and accumulations. The effectiveness of the ERM program is demonstrated by risk-adjusted capital levels and overall earnings that have remained strong through soft market conditions, the global financial crisis and the increase in global catastrophe and weather-related events.”
Best’s report also pointed out that “continued competitive pricing in the market, combined with a lower level of reserve redundancies and investment returns, require ACE to remain focused and diligent in executing pricing discipline, product and risk selection capability, and managing exposure levels to generate continued positive underwriting results.”
In addition Best cited “the group’s exposure to emerging asbestos and environmental claims and natural and man-made catastrophes” as additional offsetting factors. “The operating companies’ capital is also exposed to varying dividend demands and higher than industry average ceded reinsurance leverage, driven by the nature of its business, its agricultural and captive/cash flow programs, and recoverables relating to its run-off book,” Best added.
Best also noted that as of December 31, 2012, “ACE’s adjusted debt-to-total-capital level was 16.5 percent (excludes AOCI), which is within Best’s expectations at current rating levels. Interest coverage also remained favorable.
“Since ACE maintains substantial capital levels in its Bermuda-based operations, little cash and liquid securities are held at the ultimate holding company level. Therefore, holding company cash flows necessary to meet shareholder dividend and debt service requirements are principally met through dividends from the operating companies. Given the significant holding company cash flow requirements, there is a dependence on subsidiaries in multiple jurisdictions to provide sufficient dividend cash flow.”
Best said: “The ratings of ATLRE reflect the company’s ownership of ACE Tempest Re, which accounts for the majority of the company’s financial profile and the benefit of being part of the ACE Limited organization.” As partial offsetting factors Best noted the “potential capital and operating volatility associated with ATLRE’s run-off variable annuity reinsurance business as well as its limited life reinsurance operations.”
On the life side Best indicated that “although it is a very limited contributor to the ACE group of companies, ACE Life Insurance Company’s ratings recognize its stable capitalization, along with a very conservative investment portfolio that offers adequate liquidity to support the run-off of its remaining U.S. life reinsurance business. Offsetting rating factors include its nominal scope of operations and business profile, which is currently in run-off, and earnings volatility.
“The rating actions of the Combined companies reflect the benefit the companies receive as members of the ACE Limited organization, its consolidated financial strength, operating profile, established niche in the middle-income market for supplemental individual accident and health products, and the level of risk-based capital maintained at both entities.”
In conclusion Best said: “Factors that may lead to positive rating actions for ACE and its operating companies include continued strong underwriting and operating performance that outperforms peers over time.
“However, factors that could lead to negative rating actions include operating performance falling short of A.M. Best’s expectations or an erosion of surplus that causes a decline in risk-adjusted capital to a level that no longer supports its current ratings.
For a complete listing of ACE Limited and its subsidiaries’ FSRs, ICRs and debt ratings, please visit http://www.ambest.com/press/061403acelimited.pdf.
Source: A.M. Best
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