S&P Rates ACE/INA Notes ‘BBB+’

May 10, 2006

Standard & Poor’s Ratings Services announced that it has assigned its ‘BBB+’ senior debt rating to ACE INA Holdings Inc.’s $300 million senior debt issuance, which is due 2036 and is fully and is unconditionally guaranteed by ACE Ltd. (See IJ Website May 9).

“The ratings on ACE reflect its operating insurance companies’ strong collective competitive position as a global and diversified property/casualty group as well as their strong financial flexibility and operating performance,” stated S&P credit analyst Damien Magarelli.

S&P said: “ACE’s capitalization is viewed as strong following the incorporation of $1.5 billion in additional capital (100 percent common equity). Offsetting these positive factors are ACE’s pricing strategy, though ACE is not aggressively pricing business in all lines. In addition, ACE restated its financial statements in 2005 because of finite reinsurance accounting issues; however, the financial statement impact was minimal, and this risk is decreasing. Lastly, high recoverables and intangibles related to asbestos and environmental and Hurricane Katrina losses (adding roughly $1.0 billion) continue to restrain the rating at the current level.

“ACE’s equity issuance has improved capital adequacy and compensates for sizeable losses related to Hurricanes Katrina, Rita, and Wilma as well as other catastrophes. ACE is expected to use these funds for growth as well as to strengthen its capital adequacy further.

“ACE is also expected to use these funds to grow, including writings in Poland, Russia, China, and Vietnam, where ACE has established operations in the last year. For the outlook to remain stable, the capital adequacy ratio is expected to remain in the high ‘A’ to low ‘AA’ range, including catastrophe losses, potential reserve charges, and premium growth.

“In addition, ACE’s earnings are expected to be supported by the improved rates in many short-tail lines, leading to improved earnings in 2006 and a combined ratio of less than 95 percent (with no adjustments).”

However, S&P warned: “If an aggressive price strategy is pursued, the outlook could be revised to negative, but S&P noted that ACE had not exhibited a high-growth strategy in 2005.” The outlook could also be revised to negative if the combined ratio (with no adjustments) does not meet expectations of 95 percent in 2006, if the capital adequacy ratio drops below the high ‘A’ range, or if there is a sizeable reserve charge,” S&P added.

On the other hand the rating agency concluded that the outlook “could be revised to positive if ACE significantly exceeds these expectations on a consistent multi-year basis–but only if the proportionate size of the reinsurance recoverables also diminishes.”

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