S&P Revises Outlook on ACE Canada to Positive; Affirms ‘A’ Ratings

March 25, 2009

Standard & Poor’s Ratings Services has revised its outlook on Toronto-based property and casualty insurer ACE INA Insurance (ACE Canada) to positive from stable. S&P also affirmed the long-term ‘A’ financial strength and counterparty credit ratings on the company.

“The outlook revision reflects our assessment of the company’s underwriting performance, which we believe has been relatively consistent and strong despite softening market conditions,” explained credit analyst Foster Cheng. “Although results were weaker in 2008 compared with previous years, they remain favorable, especially when compared with those of its industry peers.”

S&P said that in its opinion, “the insurer counterparty credit and financial strength ratings on ACE Canada reflect its strong operating results, conservative and liquid investment portfolio, and strong capital base. In addition, they reflect the company’s brand recognition and support from a large and strong parent. ACE Canada is primarily a commercial lines writer and competes in most classes of commercial insurance across Canada.

“The company maintains close ties and is supported by the ACE group of companies, which allows it access to management expertise, infrastructure, and reinsurance treaties. ACE Ltd. (A-/Positive/A-2), the Bermuda-based holding company of the ACE group of companies, is one of the world’s leading providers of insurance and reinsurance.

“We consider ACE Canada to be strategically important to its parent. This means the published financial strength rating benefits from up to an additional three notches of support from the stand-alone rating, with the group methodology ceiling being one below the rating on ACE Ltd.’s core operating companies (A+/Positive/–).”

S&P said it had also factored certain “weaknesses” in the ratings. These include the company’s “relative lack of size and scale in Canada, the very competitive business environment in which it operates, its lack of control over its independent broker distribution channel, and its concentration in liability insurance products.”

S&P added that “with more than 200 companies, the Canadian property and casualty (insurance industry remains very fragmented. The lack of any industry leader(s) will allow for continued price competition and cyclicality, which ACE Canada is not immune from.”

However, S&P also indicated that “despite these challenges, the company continues to produce strong underwriting profitability, with a combined ratio that has been below 100 percent since 2002. Its average combined ratio during 2002-2007 was 75.6 percent (or 77.0 percent including 2008); this compares with an average of 86.3 percent for its predominately commercial peers and an average of 95.5 percent for the overall industry during the same time period.”

Concerning the positive outlook, S&P said it reflects the rating agency’s “expectation that the company’s strong and consistent operating performance, strong capital adequacy, and solid franchise position will be maintained throughout the soft cycle. More specifically, we expect the company to exercise underwriting discipline and continue to outperform the industry, as well as its commercial peers, with a combined ratio below 90 percent, and maintain a minimum capital test ratio above 250 percent. We expect the investment portfolio to remain conservative and well diversified with minimal asset quality issues.

S&P said that if the company were to achieve these targets, it “could raise the stand-alone ratings by one notch in 12-24 months. This, however, would only be reflected in the published rating so long as the group methodology ceiling has not already been reached (with this outlook revision, ACE Canada has reached the ceiling).” If these targets were missed and/or if insurance market conditions were to materially soften, S&P could revise the outlook to stable.

Source: Standard & Poor’s – www.standardandpoors.com

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