Fitch Ratings Affirms ACE Limited’s Ratings
Fitch Ratings has affirmed the ratings of ACE Limited and its subsidiaries, and the Rating Outlook is Stable.
The ratings agency said, “The ratings affirmation reflects ACE’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 with the advantages of global scale and a strong management team.
“ACE’s operating performance consistently exceeds peers, characterized by low combined ratios with manageable catastrophe losses, consistent favorable loss reserve development and stable investment income. The company has reported a combined ratio under 100% for 10+ consecutive years. For the five-year period 2009-2013, the average consolidated GAAP combined ratio was 91% and the operating return on equity was 12.5%.
“ACE reported nine months 2014 after-tax operating income of $2.5 billion, up over 4% versus the same period last year from continued underwriting income and premium growth. This result corresponds with an operating return on equity of 11.9%.
“The underwriting combined ratio through the first nine months of 2014 was 87.5% versus the same 87.5% for the comparable period in 2013, benefitting from favorable pricing and underwriting results both in North America and internationally. Expense ratios have trended slightly higher due in part to increasing acquisitions costs in certain lines.
“Shareholders’ equity has more than doubled in the past five and a half years to $30 billion at Sept. 30, 2014. Until recently, ACE differed from peers by not repurchasing a material amount of shares. The company announced plans to target $1.5 billion in share repurchases in 2014 and has repurchased a total of $1.1 billion of shares since November 2013 and through Oct. 20, 2014.
“The company’s financial leverage ratio was 17.7% at Sept. 30, 2014, FAS 115 adjusted, which is consistent with Fitch’s median sector credit factors for the current rating category. Leverage includes an additional $1.15 billion of pre-funded debt that will repay debt maturing in 2015. Excluding this debt, financial leverage would decline to approximately 15%.
“Operating interest coverage [excluding realized investment gains] remains favorable at approximately 15x in both 2013 and through nine months 2014. ACE has ample resources available for debt servicing needs with roughly $3.6 billion of cash and short-term investments at Sept. 30, 2014. Significant additional flexibility is provided by insurance subsidiaries that can pay nearly another $3.8 billion of dividends to the holding company without prior regulatory approval in 2014.
“Future rating action may also be constrained by sovereign rating considerations. A Fitch downgrade of Bermuda’s long-term foreign currency Issuer Default Rating [IDR] to more than four notches below ACE’s Issuer Financial Strength [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.”
