Best Affirms ACE Limited and Subsidiaries ‘A+’ Ratings

March 23, 2009

A.M. Best Co. has affirmed the financial strength ratings (FSR) of ‘A+’ (Superior) and issuer credit ratings (ICR) of “aa-” of Bermuda-based ACE Bermuda Insurance Ltd. and ACE Tempest Reinsurance Ltd. Best also affirmed the FSRs of ‘A+’ (Superior) and ICRs of “aa-” of New York-based ACE Westchester Specialty Group, ACE American Pool (Pennsylvania), ACE Tempest Life Reinsurance Ltd., ACE INA Insurance of Toronto, Canada and the UK-based ACE European Group Limited (AEGL) (See below).

In addition Best has affirmed the FSRs of ‘A’ (Excellent) and ICRs of “a” of ACE Life Insurance Company and Combined Insurance Company of America as well as the FSR of ‘B-‘ (Fair) and ICR of “bb-” of Brandywine Group of Pennsylvania.

Best also affirmed the ICRs and senior debt ratings of “a-” of ACE Limited , now headquartered in Zurich, Switzerland and Delaware-based ACE INA Holdings Inc.; as well as the debt ratings of “bbb” on the preferred securities of ACE Capital Trust II and the indicative ratings on securities to be issued under ACE’s shelf registration program.

The outlook for all of Best’s ratings on the ACE Group is stable.

“The affirmation of the ratings of ACE’s subsidiaries reflects an organization that is well diversified by business segment and geography and appropriately capitalized subsequent to significant realized and unrealized investment losses in 2008 and the $2.5 billion acquisition of Combined Insurance,” Best explained. “Furthermore, the organization maintains the capacity to generate significant cash and earnings in its domestic and overseas markets given its underwriting acumen; well manages its capital structure with a reluctance to repurchase stock and little reliance on short-term debt; and maintains significant intellectual capital.

“In addition, ACE’s balance sheet remains stable through controlled financial leverage and consistently favorable loss reserves development. In 2009, ACE’s earnings are expected to be able to absorb potential additional investment losses should they arise.”

Best said it “believes that ACE’s overall risk and catastrophe-specific exposures are well managed through a comprehensive companywide risk assessment process that is continually evolving. Earnings generating capability and stability are supported by a conservative reserving philosophy and a companywide culture and commitment to underwriting profitability providing an excellent foundation for its enterprise risk management (ERM) program to be successful.

“The ERM program relies on the close collaboration of ACE’s leaders and staff departments across the company to appropriately identify and control enterprise risk and accumulations, manage and review risks regularly and verify through comprehensive internal and external audits. However, a fair degree of earnings variability is inherent, reflecting the company’s above-average risk appetite, global reach, as well as the nature of the risks and characteristics of ACE.”

However best also outlined the following “Negative rating factors:
— an approximate 13 percent decline in equity in 2008 to $14.4 billion, mainly related to realized and unrealized investment losses totaling $3.7 billion
— higher catastrophe losses than 2007 and significantly higher intangible assets as a percentage of equity caused by the Combined Insurance acquisition.

Best explained that the “lower equity level and higher debt levels caused increased financial leverage and collectively has led to decreased financial flexibility. The realized investment losses partially emanated from non-cash exposure in ACE’s variable annuity reinsurance business, while the bulk of losses were the result of price impairment and, to a much lesser extent, credit impairment.”

However, Best also indicated that it “believes that ACE’s significant capital position at the beginning of 2008 was sufficient to absorb these losses, leaving ACE’s subsidiaries appropriately capitalized with some room for additional controlled premium growth.”

Best pointed out that “secondary to these negative rating factors are ACE’s higher than industry average ceded reinsurance recoverable leverage and continued exposure to natural and man-made catastrophes. The recoverable leverage is partially the result of several unique characteristics including ACE’s significant Brandywine run-off book and agricultural and captive/cash flow programs.

“While the Brandywine run-off operations have stabilized, ACE remains exposed long term to the potential need to shore up capital given potential adverse reserve development or capital reductions through operating losses. In 2008, Brandywine required net loss reserve increases of approximately $65 million, which was included in ACE’s overall favorable loss reserve development of $770 million.

“With regard to capital management, ACE maintains substantial capital levels in its Bermuda operations, while capital levels in other operating subsidiaries are sufficient to meet A.M. Best rating requirements. Operating subsidiary capital levels are protected by internal reinsurance arrangements with ACE affiliates, primarily in Bermuda. A.M. Best has incorporated the capital management strategy and, as a result, provides rating enhancement to a number of major ACE operating subsidiaries.

“Although the ratings of ACE Tempest Life Re were affirmed, A.M. Best has taken into consideration the impact of the severe equity market downturn on the company’s results. Profitability was negatively impacted by both falling equity market indices and declining interest rates. The adverse external events caused substantial increases in the fair market value of liabilities for the variable annuity minimum benefit guarantees. Despite earnings pressure, the capital position of ACE Tempest Life Re remains adequate to support its current ratings. The ratings of ACE Life continue to reflect its very limited scale and slow pace of growth.

“ACE’s debt-to-capital ratio at December 31, 2008 was a moderate 19.9 percent (including trust preferreds) and 25.1 percent adjusting for tangible capital. ACE continues to maintain a sizable 38.6 percent of equity in intangible assets (goodwill and deferred taxes). However, A.M. Best believes management has been and will continue to be excellent stewards of ACE’s capital.”

In conclusion Best said its “focus remains with ACE’s annual consolidated holding company cash outflows (shareholder dividends and debt service) which are estimated to be approximately $750 million in 2009. In 2008, liquidity and capital raising initiatives utilized repurchase agreements given the higher cost of capital. The majority of repurchase agreements have been settled. Holding company cash flows necessary to meet shareholder dividend and debt service requirements have resulted in an ongoing conflict between maintaining operating company capital levels and the need to dividend from the operating subsidiaries. Given the significant holding company cash flow requirements, there is a dependence on subsidiaries in multiple jurisdictions to provide sufficient dividend cash flow.

For a complete listing of ACE Limited’s FSRs, ICRs and debt ratings, go to:

Source: A.M. Best –

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