A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and the issuer credit ratings (ICR) of "aa-" of ACE Group, which consists of ACE Bermuda Insurance Ltd. (ACE Bermuda) and ACE Tempest Reinsurance Ltd. (ACE Tempest) (Bermuda). Additionally, A.M. Best has affirmed the FSRs of A+ (Superior) and the ICRs of "aa-" of ACE Westchester Specialty Group (New York) and ACE American Pool (Pennsylvania) and their members, as well as ACE Tempest Life Reinsurance Ltd. (Bermuda).
Concurrently, A.M. Best has affirmed the FSR of A (Excellent) and the ICR of "a" of ACE Life Insurance Company (ACE Life) (Connecticut) and the FSR of B- (Fair) and ICRs of "bb-" of Brandywine Group (Brandywine) (Pennsylvania) and its members. The FSR of A+ (Superior) and ICR of "aa-" of ACE European Group Limited (AEGL) (United Kingdom) are unchanged.
A.M. Best also has upgraded the FSR to A+ (Superior) from A (Excellent) and the ICR to "aa-" from "a" of ACE INA Insurance (Canada) (ACE INA) (Toronto, Canada).
Additionally, A.M. Best has affirmed the ICRs and senior debt ratings of "a-" of ACE Limited (ACE) (Cayman Islands) [NYSE:ACE] and ACE INA Holdings Inc. (Delaware) and withdrawn the short-term commercial paper ratings of AMB-2 of ACE and ACE INA Holdings Inc. These rating actions are in conjunction with ACE's strategic retirement of its commercial paper program and corresponding bank credit facilities.
In addition, A.M. Best has affirmed the debt ratings of "bbb" on preferred securities of ACE Capital Trust II and the indicative ratings on securities to be issued under ACE's shelf registration program. The outlook for all ratings is stable.
The affirmation of the ratings of ACE Group and the U.S. subsidiaries reflects an organization that is well diversified by business segment and geographics, well capitalized with a stable balance sheet, maintains the capacity to generate significant earnings within a difficult pricing environment in many of its domestic and overseas markets, is committed to a comprehensive enterprise risk management (ERM) structure and has a credible and experienced management team. A.M. Best believes that ACE's overall risk and catastrophe specific exposures are well managed through comprehensive company-wide risk assessment and catastrophe modeling coupled with good data quality, the use of appropriate policy limits within the company's business model framework, above-average risk appetite and capital position. A fair degree of earnings variability is, however, inherent, reflecting the nature of the risks and characteristics of ACE.
Earnings generating capability and stability are supported by a conservative reserving philosophy and a company-wide culture and commitment to underwriting profitability providing an excellent foundation for its ERM program to be successful. The underwriting commitment is imperative given that ACE is by design an above average risk accepting company whose stability rests on the ability to properly understand and appropriately price its property and casualty exposures. Specifically to this point, the top line of certain business segments where pricing is exceptionally competitive will noticeably decline in contrast to other existing and new market participants. However, ACE's overall breadth of product and global opportunities provides a balance to overall top line stability.
With regard to capital management, ACE maintains substantial capital levels in its Bermuda operations, while capital levels in other operating subsidiaries are sufficient to meet A.M. Best rating requirements. Operating subsidiary capital levels are protected by internal reinsurance arrangements with ACE affiliates, primarily in Bermuda. A.M. Best has incorporated the capital management strategy and, as a result, provides rating enhancement to a number of major ACE operating subsidiaries.
It is noteworthy to mention that ACE management has chosen to maintain its current excellent capital levels to support organic growth, potential acquisition opportunities and stability of book value per share in contrast to many industry participants who have executed exceptional stock repurchase programs. In addition, the company has currently remained leery of including engineered capital products in its capital structure to avoid future complications including potential pressure to issue or repurchase stock at an inappropriate time. A.M. Best believes management has been and will continue to be excellent stewards of ACE's capital. To this end, ACE's existing diversification and earnings generating capability allows management to utilize patience in its quest for profitable growth and in the evaluation of appropriate acquisitions.
ACE maintains a structured and exceptionally comprehensive ERM program, which includes economic capital modeling and addresses the concerns of risk aggregation across business divisions, establishment of accumulation guidelines, analysis and mitigation of external threats, communication to profit centers of definition of risk, risk tolerance and limits, strategic credit risk, cycle management, and monitoring of risk control processes. The ERM program is constantly evolving, and included in 2007 was operational risk, M&A, regulatory and policyholder behavior risk. A.M. Best believes there is a strong management commitment and provision of appropriate resources to this program supported by intellectual capital.
A significant negative rating factor is execution risk. Despite its positive track record, ACE"”along with the rest of the industry"”must remain constantly diligent with regard to price and levels of exposure in order to continue to generate positive underwriting margins and profitability. This is particularly applicable given ACE's above-average risk tolerance and spread of operations. Secondary to execution risk, other negative rating factors include higher than industry average ceded reinsurance recoverable leverage and continued exposure to natural and man-made catastrophes. The recoverable leverage is partially the result of several unique characteristics including ACE's significant run-off book, and agricultural and captive/cash flow programs. While the Brandywine run-off operations have stabilized, ACE remains exposed to the potential need to shore up capital given adverse reserve development or capital reductions through operating losses. Finally, ACE continues to be exposed to scrutiny and fines from regulatory agencies and several lawsuits whose financial impact cannot be predicted, although A.M. Best believes that they have been and will continue to be manageable.
The ACE INA rating actions reflect A.M. Best's view that the company maintains excellent capitalization, has delivered consistently strong operating performance for several years and receives solid brand recognition as a subsidiary of ACE. The results are supported by significant underwriting profits, dependable net investment income and proficient expense management. The five-year average combined and operating ratios are 78.6% and 68.8%, respectively. The rating actions also reflect the significant benefits ACE INA derives from ACE including its underwriting culture, access to intellectual resources, management credibility, ERM program, financial and marketing expertise and system synergies.
The rating affirmations of ACE Tempest Life Reinsurance Ltd. are based on the importance of global reinsurance to the ultimate parent, along with the company's strong capitalization, favorable operating performance and strong risk management and modeling capabilities. Partially offsetting these items are the uncertain impact with respect to potential sharp equity market downturns and a relatively modest market profile.
ACE Life is the platform to enable ACE to expand its presence in the traditional U.S. life reinsurance arena. The rating affirmations of ACE Life are based on A.M. Best's belief that the company's business model is reasonably conservative, coupled with the expectation that ACE will lend the capital support necessary to fund its growth. Offsetting rating factors include the lack of U.S. operating history and the relatively modest volume of business to date.
ACE's debt-to-capital ratio at September 30, 2007 was a moderate 13.3% (including trust preferreds) and 15.6%, adjusting for tangible capital. ACE continues to maintain a sizable 24.3% of equity in intangible assets (goodwill and deferred taxes). A.M. Best's focus remains with ACE's annual consolidated holding company cash outflows (shareholder dividends and debt service), which are in excess of $630 million. Holding company cash flows needed to meet shareholder dividend and debt service requirements result in an ongoing conflict between maintaining operating company capital levels and the need to dividend from operating subsidiaries. Given the significant holding company cash flow requirements, there is a dependence on subsidiaries in multiple jurisdictions to provide sufficient dividend cash flow to the holding companies. ACE's considerable financial flexibility does provide support for any maturing debt to be refinanced, which is subject to the vagaries of the capital markets.
For a complete listing of ACE's FSRs, ICRs and debt ratings, please visit www.ambest.com/press/112603ace.pdf.
Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.
