Fitch Ratings upgraded the senior debt ratings of ACE Limited and its subsidiary ACE INA Holdings Inc. to “A” from “A-” and the issuer default ratings (IDR) of ACE and ACE INA to “A+” from “A”, as well as their commercial paper ratings to ‘F1’ from ‘F2’. At the same time, Fitch upgraded ACE’s preferred stock rating to “A-” from “‘BBB+” and the ratings of the capital securities issued by ACE Capital Trust II to “A-” from “BBB+”. The outlook on all of the rating s is stable.
Concurrent with the holding company debt revisions, Fitch upgraded the insurer financial strength (IFS) ratings of INA Holdings to “AA-” from “A+, also with a stable outlook. In conjunction with the upgrades, Fitch assigned an IFS rating of “AA-” to ACE Bermuda Insurance Limited, ACE Tempest Reinsurance Limited, Westchester Fire Insurance Company and Westchester Surplus Lines Insurance Company, also with a stable outlook. At the same time, Fitch affirmed the “B-” IFS rating of Century Indemnity Co., but with a negative outlook and the “CCC+” rating of Century Reinsurance Co. also with a negative outlook.
“The upgrades reflect a strong capital formation that has resulted primarily from earnings and, to a lesser extent, from capital market transactions,” said Fitch. “ACE has steadily grown its ordinary shareholders’ equity through earnings and a $1.5 billion share offering in 2005. As a result, ordinary shareholders’ equity increased by 48 percent in the last two years, to $13.7 billion at year-end 2006 from $9.3 billion at year-end 2004. Tangible equity has grown in conjunction with the growth in shareholders’ equity and has more than tripled since 2001. Additionally, financial leverage has fallen significantly from its high point in 1999.”
The rating agency also noted that “ACE reported record net income of $2.3 billion for the year ended December 31, 2006. This level of earnings was not surprising, given the relatively low level of natural catastrophe losses in 2006.” Moreover ,Fitch pointed out that “ACE was also able to report earnings of $1 billion in 2005, a year with significant catastrophe losses, including Hurricane Katrina, the single largest insured catastrophe loss ever.”
Fitch explained that the rating actions also reflect its “declining concern about ACE’s asbestos and environmental (A&E) liabilities. After several years of significant adverse development, the 2006 A&E reserve review showed stabilization in the development of those liabilities. This stabilization has resulted from claims payments, commutations, and the sale of certain run-off reinsurance subsidiaries that was completed in 2006.” Fitch indicated, however, that “the amount ACE has recorded for A&E liabilities is still below the amount estimated by independent actuaries.” However, Fitch also noted that “the independent actuaries reduced their estimate in the most recent biennial reserve review to be closer ACE’s recorded estimate and, as a result, ACE recorded no development in 2006.”
Concerning the “AA-” ratings assigned to ACE Bermuda and ACE Tempest Re, Fitch said they “reflect the significance of the contributions made by those subsidiaries to the group’s capital strength, both in terms of earnings and equity. Likewise, Fitch views Westchester Fire and Westchester Surplus Lines as important parts of ACE’s US operations.”
Taking account of the overall picture, Fitch said it “believes pricing has peaked for US non-catastrophe risks. As a result, ACE’s growth in written premium may slow or reverse as some risks become inadequately priced. Fitch also believes 2006 will represent a near-term peak for property/casualty company earnings and Fitch expects a narrowing of margins in 2007 due to both softer insurance pricing and more normal levels of catastrophe losses. Nonetheless, Fitch expects ACE’s earnings to be good, with an underwriting profit in most years, and earnings-based fixed charge coverage to remain above 4 times.
“The current ratings do not anticipate any significant acquisitions, any reinsurance collectiblity problems in excess of ACE’s established allowance for doubtful accounts or a material change to the Brandywine restructuring agreement.”
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