Best Affirms ACE Australia ‘A’ Rating

November 18, 2004

A.M. Best Co. announced that it has affirmed the financial strength rating of “A” (Excellent) of ACE Insurance Limited (ACEAU) (Australia) with a stable outlook.

“The rating reflects ACEAU’s strong profitability, improved underwriting performance and prudent capitalization,” Best said. “The effective operation, coupled with stable investment returns, has further strengthened the company’s financial position.

“ACEAU has achieved consistent improvement in operating performance over the past two years. The company, which is comprised of the Australian operations and Thailand branch, recorded net income after tax of AUD 59 million (U.S. $44 million), with a growth of 211 percent compared with the previous year. Both investment and underwriting activities have made significant contributions to the profit margin. Driven by its sound investment strategy, the company’s investment yield has remained stable over the years with limited volatility.”

Best also noted that with the implementation of “successful underwriting controls and claims management, ACEAU improved its underwriting margin to AUD 55 million (U.S. $42 million) in fiscal year 2003 from a loss of AUD 15 million (U.S. $11 million) in fiscal year 2001. The loss ratio also improved in fiscal year 2003 to 44 percent, the lowest in five years. The combined ratio has been consistently below 100 percent over the past two years.

“ACEAU’s capitalization has shown continuous improvement supported by the Best’s Capital Adequacy Ratio, which measures capitalization on a risk-adjusted basis. The capital adequacy multiple under the Australian Prudential Regulation Authority (APRA) regulatory standards stood at 2.09 times as of fiscal year-end 2003. Risk concentration, while being an offsetting factor, is mitigated by the absence of major catastrophe risks in Australia.”

The rating agency cited as “offsetting factors, ACEAU’s small market size, intensified market competition and concerns with the expansion in the long-tailed liability businesses.”

Best explained that “Australia’s general insurance industry is highly concentrated, with the top five companies accounting for over 70 percent of total market premiums. With a relatively small market presence coupled with fierce competition, ACEAU will face challenges in further expanding its business portfolio. Despite the company’s balanced business composition, the strategic focus in expanding the financial lines portfolio is a concern given the high risk and long tail nature of this business segment, particularly under a softening pricing environment.”

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