TEXT-S&P Rates ACE Seguros S.A. 'A-'

Thu Oct 4, 2012 6:46pm EDT

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(The following was released by the rating agency)

Overview

-- Mexico-based insurer ACE Seguros is a strategically important subsidiary to its parent ACE Group.

-- We have assigned our 'A-' financial strength rating to ACE Seguros.

-- The stable outlook is based on our expectations that the company will maintain its strategic importance for its parent and that it will continue to focus on accident and health business line and will maintain strong capital levels.

Rating Action On Oct. 4, 2012, Standard & Poor's Ratings Services assigned its 'A-' financial strength rating to ACE Seguros S.A. The outlook is stable.

Rationale

The rating on ACE Seguros is based on its membership in the ACE Group, top management's extensive expertise, the successful development of its corporate strategy, and the strong level of capitalization due to a very conservative investment portfolio and good earnings generation. The negative rating factors include the company's small scale in the competitive Mexican insurance industry and a somewhat low diversification of its distribution channels.

ACE Seguros is the Mexican subsidiary of ACE Group, and ACE INA International Holding, Ltd., both of which hold all of the subsidiary's shares. Under our group methodology, ACE Seguros is a strategically important subsidiary to its parent, which provides three-notch uplift to its stand-alone credit profile. ACE Seguros was incorporated into the group in 1999 following ACE Group's acquisition of Cigna. The group is expecting to further expand its presence in Latin American markets in the upcoming years, and it considers Mexico and Brazil as the most significant markets in the region.

We regard ACE Seguros' business risk profile as marginal due to the solid management experience, the long track record of ACE Group in Latin America and Mexico in particular, the consistent support from its parent, and the ability to position the company as niche product insurer. Its corporate strategy only focuses on the lines of business that generate net profits.

Despite holding only 1% of total market share, the company has a large presence in A&H lines, which is the core of its business. Furthermore, ACE Seguros is the second-largest provider of car insurance for tourists and personal accident insurance. In our view, one of the company's main weaknesses is the small diversification of its distribution channels, because ACE Seguros still depends on nonexclusive brokers to sell about 62.5% of its premiums.

Standard & Poor's considers ACE Seguros' enterprise risk management (ERM) to be adequate, since it is based on ACE Group's ERM practices and we do not expect the company will experience losses in excess of its risk tolerances for traditional insurance risks.

Our view of the company's financial profile is based on the strong level of capitalization, and its good profitability and credit quality of its investment portfolio.

We consider its operating performance to be satisfactory mainly because of, with the exception of 2007 and 2008, the company has shown net profits, positive underwriting results, and better combined ratios than the industry. However, for the past three years, its average return on revenues of 4.7% and return on equity of 7% had been slightly lower than the industry averages. The lower investment yields, given the very conservative investment policies and higher catastrophic reserves than the industry, result in a lower profitability, despite the company's better underwriting profile, as seen in its very low loss ratios (38% average in the past six years). We consider ACE Seguros' capitalization as very strong based on the results obtained in our capital adequacy model that illustrate strong reinsurance program which limits its retention levels and catastrophic exposure and soundness of its investment portfolio.

Outlook

The stable outlook on ACE incorporates our expectations of its good performance and that the company will remain a strategically important subsidiary, taking advantage of the group's expertise and support that currently results in three-notch uplift in the company's stand-alone profile. We expect the company to remain focused on the A&H business offering differentiated products, which has been the core of its corporate strategy and resulted in a profitable business. We expect the life business to start increasing its share of the company's operation, resulting in about 15% of GWP by 2017. In 2012 and 2013, we expect a growth in GWP of about 15%-20%, probably slowing by 2013, underwriting profitability to remain good with combined ratios of 85%-90% thanks to loss ratios of around 35%. Our outlook is also based on the expectation that capitalization will remain very strong due to conservative investment policies and good profitability.

We could downgrade the company if it doesn't meet our expectations on operating and underwriting performance, if capital adequacy, as measured by our capital model, deteriorates, or if we believe that the company is no longer a strategically important subsidiary for the parent.

Related Criteria And Research

-- Assumptions For Quantitative Metrics Used In Rating Insurers Globally, April 14, 2011

-- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010

-- Interactive Ratings Methodology, April 22, 2009

-- Group Methodology, April 22,

-- Summary Of Standard & Poor's Enterprise Risk Management Evaluation Process For Insurers, Nov. 26, 2007

Ratings List

New Rating; CreditWatch/Outlook Action

ACE Seguros, S.A.

Counterparty Credit Rating

Local Currency A-/Stable/--

Financial Strength Rating

Local Currency A-/Stable/--

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