S&P’s Removes ACE Ltd. Short-term Debt Ratings from CreditWatch

February 10, 2003

Standard & Poor’s announced that it has “removed from CreditWatch and affirmed its ‘A-2’ short-term counterparty credit and commercial paper ratings on ACE Ltd. because the ratings are strengthened by the company’s liquid investment portfolio and supporting bank facilities.”

S&P’s said, however, that it would maintain its CreditWatch, first announced at the end of January, on the company’s ‘A-‘ long-term counterparty credit and senior debt ratings and its ‘BBB’ preferred stock rating. “The ‘A+’ counterparty credit and financial strength ratings on various members of the ACE Group and the ‘BBB’ counterparty credit and financial strength ratings on specific members of the Brandywine Group also remain on CreditWatch negative,” said the bulletin.

The CreditWatch reflects S&P’s “concerns about ACE’s prospective capital-management strategies and increasing credit risk to reinsurance recoverables,” said the announcement. “In addition, the managed run-off of historical liabilities associated with old CIGNA Corp. property/casualty books of business and other discontinued business lines will remain an inherent drag on ACE’s prospective earnings and cash flows for the near term.”

The bulletin recognized the impact of ACE’s recent charge for strengthening its reserves to deal with asbestos claims (See IJ Website Jan. 27), and the affect on the company’s fourth quarter results. S&P noted that “ACE’s earnings capacity (excluding its asbestos-related charge) for 2002 was benefiting from operational strategies implemented (albeit continuing) since 2000, and expectations are that good cash flows and strong premium growth from calendar year 2002 should positively influence ACE’s earnings for 2003.”

“However,” the bulletin continued, “ACE’s earnings potential and financial strength could continue to be burdened by inherited legacy issues from the CIGNA acquisition, and material exposure to collectability issues with reinsurance recoverables remains a concern.”

“When the CreditWatch status of the long-term ratings on ACE and its subsidiaries is resolved, the ratings could be affirmed or lowered by one or – at worst – two notches,” stated S&P’s credit analyst Frederick Loeloff. “Standard & Poor’s removed from CreditWatch and affirmed the short-term ratings on ACE because a potential two-notch downgrade on the long-term ratings is a worst-case scenario, and the short-term ratings are strengthened by the company’s liquid investment portfolio and supporting bank facilities.”

S&P’s added that it was “in the process of reviewing ACE’s overall operations and continues to monitor each operating segment’s financial strength, capital adequacy, and risk-management efforts to reduce exposure to credit risk and prospective adverse loss development. The review is expected to be completed by the end of February 2003.”

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