Fitch Affirms ACE After Bermuda Downgrade

June 10, 2013

Fitch Ratings today [June 10] affirmed the ratings of ACE Limited and its subsidiaries following Fitch’s downgrade of Bermuda on June 7th.

A statement from the ratings agency said, “ACE’s ‘AA’ IFS ratings are now one notch above the sovereign long-term foreign currency and local currency IDR. According to Fitch’s Insurance criteria, very strong organizations can typically be rated one to two notches above the long term sovereign rating.

“In the specific case of ACE, Fitch has determined it may be rated two or more notches higher than the sovereign rating. Although ACE has significant operations in Bermuda, the company’s large and diverse global profile, with assets, insurance premiums and underwriting exposures spread across many countries, limits the exposure to Bermuda sovereign risk. ACE does not hold any Bermuda sovereign debt.”

“Additionally, a Fitch downgrade of Bermuda long-term foreign currency IDR to more than two notches below ACE’s IFS rating, may promote consideration of a downgrade in ACE’s ratings. Fitch notes that ACE’s debt ratings currently benefit from narrower notching relative to the insurance company financial strength ratings as a result of Bermuda’s moderate regulatory environment. This narrower notching may be revised in the future as Fitch evaluates the impact of Solvency II and other possible regulatory changes on Bermuda’s insurance regime.”

The full statement from Fitch is below:

Fitch Ratings has affirmed the ratings of ACE Limited and its subsidiaries (ACE) following Fitch’s downgrade of Bermuda’s sovereign long-term Issuer Default Ratings (IDR) and country ceiling rating. ACE’s Rating Outlook is Stable. A complete list of ACE’s ratings follows at the end of this release.

On June 7, 2013, Fitch downgraded Bermuda’s long-term foreign currency IDR to ‘AA-’ from ‘AA’, the long-term local currency IDR to ‘AA-’ from ‘AA+’ and the country ceiling rating to ‘AA+’ from ‘AAA’. The Rating Outlook was revised to Negative from Stable.

KEY RATING DRIVERS

ACE’s ‘AA’ IFS ratings are now one notch above the sovereign long-term foreign currency and local currency IDR. According to Fitch’s Insurance criteria, very strong organizations can typically be rated one to two notches above the long term sovereign rating. In the specific case of ACE, Fitch has determined it may be rated two or more notches higher than the sovereign rating. Although ACE has significant operations in Bermuda, the company’s large and diverse global profile, with assets, insurance premiums and underwriting exposures spread across many countries, limits the exposure to Bermuda sovereign risk. ACE does not hold any Bermuda sovereign debt.

On May 14, 2013, Fitch upgraded ACE’s ratings one notch following its customary annual review process. ACE’s ratings reflect the company’s continued strong operating performance despite competitive market conditions, strong balance sheet position and financial flexibility with moderate leverage, and diverse sources of revenues and earnings. ACE’s operating performance is consistently strong, characterized by low combined ratios with manageable catastrophe losses and consistent favorable loss reserve development and stable investment income.

RATING SENSITIVITIES

Key rating triggers that may lead to an upgrade include very strong operating performance with a combined ratio consistently under 85%, material stockholders’ equity growth, and maintaining a track record of successful acquisition execution while managing financial leverage to under 20% and run-rate leverage at or under 15%. Fitch expects operating earnings-based interest and preferred dividend coverage to remain at or above 15x, and for ACE’s retention ratio (net premium written to gross premium written) to increase over time to be more in line with highly-rated peers. Future rating upgrades may also be constrained by sovereign rating considerations.

Key rating triggers that may lead to a downgrade include a sustained material deterioration in operating performance such that the combined ratio is consistently less profitable at over 95%, a significant 15%-20% reduction in stockholders’ equity that is not recovered in the near term, and financial leverage consistently over 25%. Potential for future acquisitions and the associated integration risks and company profile changes could lead to pressure on the ratings, upward or downward, depending on the nature and size of the acquisition and corresponding integration risks.

Additionally, a Fitch downgrade of Bermuda long-term foreign currency IDR to more than two notches below ACE’s IFS rating, may promote consideration of a downgrade in ACE’s ratings. Fitch notes that ACE’s debt ratings currently benefit from narrower notching relative to the insurance company financial strength ratings as a result of Bermuda’s moderate regulatory environment. This narrower notching may be revised in the future as Fitch evaluates the impact of Solvency II and other possible regulatory changes on Bermuda’s insurance regime.

Fitch has affirmed the following ratings with a Stable Outlook:

ACE Limited
–Issuer Default Rating (IDR) at ‘AA-’.

ACE INA Holdings Inc.
–IDR ‘AA-’;
–$500 million senior notes due 2014 at ‘A+’;
–$450 million senior notes due 2015 at ‘A+’;
–$700 million senior notes due 2015 at ‘A+’;
–$500 million senior notes due 2017 at ‘A+’;
–$300 million senior notes due 2018 at ‘A+’;
–$500 million senior notes due 2019 at ‘A+’;
–$475 million senior notes due 2023 at ‘A+’;
–$100 million senior debentures due 2029 at ‘A+’;
–$300 million senior notes due 2036 at ‘A+’;
–$475 million senior notes due 2043 at ‘A+’.

ACE Capital Trust II
–$300 million capital securities due 2030 at ‘A-’.

ACE American Insurance Company
ACE Bermuda Insurance Limited
ACE Fire Underwriters Ins. Company
ACE INA Overseas Insurance Company Ltd.
ACE Insurance Company of the Midwest
ACE Property and Casualty Insurance Company
ACE Tempest Reinsurance Limited
Agri General Insurance Company
Atlantic Employers Insurance Company
Bankers Standard Fire & Marine Company
Bankers Standard Insurance Company
Illinois Union Insurance Company
Indemnity Insurance Company of North America
Insurance Company of North America
Pacific Employers Insurance Company
Westchester Fire Insurance Company
Westchester Surplus Lines Insurance Company
–IFS at ‘AA’.

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