S&P’s Affirms ACE Capital Re Group ‘AA’ Ratings

May 23, 2003

Standard & Poor’s Ratings Services has affirmed its ‘AA’ counterparty credit and financial strength ratings on the insurance subsidiaries that make up the ACE Capital Re Group (ACR): ACE Capital Re International Ltd., ACE Capital Re Overseas Ltd., ACE Capital Mortgage Reinsurance Co., and ACE Capital Title Reinsurance Co.

S&P’s said it had also affirmed its ‘AA’ financial enhancement ratings on ACE Capital Re International Ltd. and ACE Capital Re Overseas Ltd. All of the companies have a “stable” outlook.

“The affirmations reflect parent ACE Ltd.’s (ACE; BBB+/Negative/A-2) strategic commitment to ACR’s financial guaranty/specialty business lines, the structured independence of ACR from ACE’s property/casualty operations, and ACR being a franchise that has a unique market position in niche businesses that provide ACE with an annuity-like earnings stream,” noted S&P credit analyst Frederick Loeloff.

S&P’s asserted: “ACR is well capitalized given the group’s books of business and growth plans, adhering to conservative underwriting practices and modest single-risk limits. Origination is well diversified by business line/sector, with the largest portion of the group’s premiums still being derived from its traditional mortgage/financial guaranty books.

“Expectations are that reduced competition and increased business opportunities will allow ACR to maintain prospective earnings stability. However, as market visibility increases, long-term growth could be restricted by ACR’s modest scale and the return of larger, financially secure competition.

“Since 2000, ACR has provided ACE with consistent earnings diversification, and its parent and affiliates have exhibited support through capital infusions and reinsurance protection.”

It also noted that, “Although ACR’s operating earnings and cash flows should remain strong in 2003, asset write-downs, credit risk, and operational stability continue to modestly challenge ACR’s ability to maintain stable earnings and capital adequacy. For 2003, Standard & Poor’s believes ACR’s capital adequacy ratio will remain at least 175 percent and that ACR will post an ROR of about 35.0 percent on a combined ratio of about 95 percent.”

S&P’s said the group’s “increased market acceptance” has allowed it “to compete effectively with larger peers while operational benefits continue to be obtained from its historical relationship to sister/affiliate ACE Guaranty Corp. (AAA/Negative/–). In addition, two of ACR’s group members are the first professional reinsurers serving the residential mortgage guaranty and title insurance industries.”

S&P’s concluded, “ACR’s limited client base and virtually monoline risk profile have prompted management to underwrite new risks for earnings diversification. Underwriting guidelines and capital allocation are improving to encompass these risks, but an industry downturn or large loss event would materially affect the group’s prospective earnings structure.”

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