Fitch Affirms ACE Ltd.’s Ratings
Fitch Ratings today [Mar.8] affirmed the ratings of Bermuda- and Switzerland-based ACE Limited and its subsidiaries. The Rating Outlook is revised to Positive from Stable.
Fitch’s rating actions reflect ACE’s continued strong operating performance, solid balance sheet and financial flexibility, and diverse sources of revenues and earnings.
Partially offsetting these positives is the effect of modestly rising accident-year combined ratios and the effect of continued significant competition in the company’s chosen markets.
Fitch views ACE’s operating performance as consistently strong characterized by low combined ratios with manageable catastrophe losses and consistent favorable loss reserve development and stable investment income.
The company has reported a combined ratio under 100% for nine consecutive years. The 2011 combined ratio was 94.6%, despite experiencing $899 million of pre-tax catastrophe losses including reinstatements (6.6% of earned premium) versus $401 million (3.4%) in 2010.
ACE reported net income of $1.6 billion and operating income of $2.4 billion for the year ended December 31, 2011, down from $3.1 billion and $2.7 billion, respectively, in 2010.
The reduction in net income was largely due to a shift in realised investment losses primarily related to mark to market accounting in ACE’s life reinsurance segment.
ACE has steadily grown its ordinary shareholders’ equity with solid earnings. As a result, shareholders’ equity has increased by 47% since year-end 2007 to $24.5 billion at December 31, 2011.
Tangible equity has grown in conjunction with the growth in shareholders’ equity and has more than tripled since 2001. Fitch also notes that ACE, unlike many of its peers, has not repurchased a material amount of shares during the current soft market other than to partially offset potential dilution related to share-based compensation plans.
ACE maintains a relatively conservative investment portfolio allocation and has the ability to withstand potential near-term volatility and investment losses without a material impact on the company’s capitalization.
The portfolio primarily consists of investment grade fixed income securities.
Fitch’s rating on ACE’s indirect subsidiary, Century Indemnity Co. (Century), reflects Fitch’s view that the company’s importance to ACE is limited due to Century’s run-off status and thin capitalization.
The company maintains inactive operations largely consisting of asbestos and environmental (A&E) reserves that are in run-off. Fitch views Century’s potential A&E exposure as an increasingly smaller component of ACE’s overall exposures.
Key rating triggers that may lead to an upgrade include continued strong operating performance with a combined ratio consistently under 95%, continued stockholders’ equity growth, and maintaining a track record of successful acquisition execution while managing financial leverage to under 25% total debt to capital and run-rate leverage at or under 20%.
Fitch expects operating earnings-based interest and preferred dividend coverage to remain at or above 10x. Fitch also expects ACE’s retention ratio (net premium written to gross premium written) to increase over time to be more in line with higher-rated peers.
Fitch notes that an upgrade may be more applicable to ACE’s insurer financial strength ratings (IFS) rather than the senior debt ratings as Fitch evaluates the impact of Solvency II and possible regulatory changes on Bermuda’s insurance regime.
ACE’s debt ratings currently benefit from narrow notching as a result of Bermuda’s moderate regulatory environment.
Key rating triggers that may lead to a downgrade include a sustained material
deterioration in operating performance such that the combined ratio is consistently unprofitable at over 100%, a significant reduction in stockholders’ equity that is not recovered in the near term, and financial leverage consistently over 30%.
Potential for future acquisitions and the associated integration risks and company profile changes could lead to pressure on the ratings, depending on the acquisition details.
ACE Limited is the parent company of the ACE Group, a global provider of insurance products covering property and casualty, accident and health, reinsurance, travel, creditor, and life insurance.
It also operates in the Lloyd’s insurance market in London. It offers services including process management, unusual hazards identification and expected loss calculations, and engineering services.
Clients of the ACE Group consist of multinational corporations and local businesses, insurers seeking reinsurance coverage, and individuals purchasing insurance policies.
Fitch has affirmed the following ratings:
ACE Limited
–Issuer Default Rating (IDR) at ‘A+’.
ACE INA Holdings Inc.
–IDR at ‘A+’;
–$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’;
–$100 million senior debentures due 2029 at ‘A’;
–$300 million senior notes due 2036 at ‘A’.
ACE Capital Trust II
–$300 million capital securities due 2030 at ‘BBB+’.
ACE American Insurance Company
ACE Bermuda Insurance Limited
ACE Fire Underwriters Ins. Company
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
Combined Insurance Company of America
Combined Life Insurance Company of New York
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-’.
Century Indemnity Company
–IFS at ‘B-’.
The Rating Outlook is Positive.
