Fitch Upgrades ACE Limited's IFS Ratings to 'AA'; Sr. Debt to 'A+'

Tue May 14, 2013 10:34am EDT

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(The following statement was released by the rating agency) CHICAGO, May 14 (Fitch) Fitch Ratings has upgraded the ratings of ACE Limited and its subsidiaries (ACE) one notch. The senior debt ratings were upgraded to 'A+' from 'A', the Issuer Default Ratings to 'AA-' from 'A+', and the Insurer Financial Strength (IFS) ratings to 'AA' from 'AA-'. The Rating Outlook was revised to Stable from Positive. Fitch has also withdrawn the IFS ratings of subsidiaries Combined Insurance Company of America and Combined Life Insurance Company of New York following the ratings upgrade and revision to Stable Outlook. A complete list of ratings follows at the end of this release. KEY RATING DRIVERS The rating upgrades reflect ACE's continued strong operating performance despite competitive market conditions, strong balance sheet position and financial flexibility with moderate leverage, and diverse sources of revenues and earnings. All of Fitch's prior upgrade rating triggers have been met and surpassed in the current year and on a run-rate basis. Fitch expects ACE to maintain operations at this higher level going forward. ACE's operating performance is consistently strong, characterized by low combined ratios with manageable catastrophe losses and consistent favorable loss reserve development and stable investment income. The company has reported a combined ratio under 100% for 10 consecutive years. The 2012 combined ratio was 93.9% despite experiencing $633 million of pre-tax catastrophe losses including reinstatements and $147 million of pre-tax crop insurance losses. ACE reported a higher combined ratio of 94.7% for 2011 due primarily to $859 million of pre-tax catastrophe losses in a year of industry-wide record-high losses. ACE's insurance and reinsurance losses from Superstorm Sandy totaling $393 million after tax represented an earnings event rather than a capital event. Recent losses from natural catastrophe events relative to peers provide a demonstration of the benefits from the company's diverse global book of business, strong capitalization, and risk management practices. ACE reported net income of $2.7 billion and operating income of $2.6 billion in 2012, up over 75% and 12% from $1.6 billion and $2.4 billion, respectively, in 2011. This result corresponds with an operating return on equity of 11.0% in 2012 and 10.6% in 2011. The increase in net income was largely due to reduced catastrophe losses and a shift in realized investment gains primarily related to mark-to-market accounting in ACE's life reinsurance segment. Shareholders' equity has nearly doubled in the past five years and 15% since year-end 2011 to $27.9 billion through Mar. 31, 2013. Tangible equity has grown in conjunction with the growth in shareholders' equity and has more than doubled since 2008. Fitch also notes that ACE, unlike many of its peers, has not repurchased a material amount of shares during the current soft market other than to partially offset potential dilution related to share-based compensation plans. The company repurchased a modest $7 million of shares in 2012 and $132 million in 2011. The company's reported debt-to-total capital ratio was 15.6% at Dec. 31, 2012, which is consistent with Fitch's median sector credit factors for the current rating category. An increase in leverage to 17.7% as of March 31, 2013 was due to the pre-funding of $950 million of debt coming due in 2014 and 2015. Operating interest coverage (excluding realized investment gains) remains favorable at 12.6x for 2012. ACE has ample resources available for debt servicing needs with roughly $3.7 billion of cash and short-term investments at March 31, 2013. Significant additional flexibility is provided by insurance subsidiaries that can pay nearly another $2.9 billion of dividends to the holding company without prior regulatory approval in 2013. Fitch has withdrawn the Combined Insurance Company of America and Combined Life Insurance Company of New York IFS ratings as the ratings are no longer considered by Fitch to be relevant to the agency's coverage. RATING SENSITIVITIES Key rating triggers that may lead to an upgrade include very strong operating performance with a combined ratio consistently under 85%, material stockholders' equity growth, and maintaining a track record of successful acquisition execution while managing financial leverage to under 20% and run-rate leverage at or under 15%. Fitch expects operating earnings-based interest and preferred dividend coverage to remain at or above 15x, and for ACE's retention ratio (net premium written to gross premium written) to increase over time to be more in line with higher-rated peers. Key rating triggers that may lead to a downgrade include a sustained material deterioration in operating performance such that the combined ratio is consistently less profitable at over 95%, a significant 15%-20% reduction in stockholders' equity that is not recovered in the near term, and financial leverage consistently over 25%. Potential for future acquisitions and the associated integration risks and company profile changes could lead to pressure on the ratings, upward or downward, depending on the nature and size of the acquisition and corresponding integration risks. Fitch notes that ACE's debt ratings currently benefit from narrower notching relative to the insurance company financial strength ratings as a result of Bermuda's moderate regulatory environment. This narrower notching may be revised in the future as Fitch evaluates the impact of Solvency II and other possible regulatory changes on Bermuda's insurance regime. Fitch has upgraded the following ratings: ACE Limited --Issuer Default Rating (IDR) to 'AA-' from 'A+'. ACE INA Holdings Inc. --IDR to 'AA-' from 'A+'; --$500 million senior notes due 2014 to 'A+' from 'A'; --$450 million senior notes due 2015 to 'A+' from 'A'; --$700 million senior notes due 2015 to 'A+' from 'A'; --$500 million senior notes due 2017 to 'A+' from 'A'; --$300 million senior notes due 2018 to 'A+' from 'A'; --$500 million senior notes due 2019 to 'A+' from 'A'; --$475 million senior notes due 2023 to 'A+' from 'A'; --$100 million senior debentures due 2029 to 'A+' from 'A'; --$300 million senior notes due 2036 to 'A+' from 'A'; --$475 million senior notes due 2043 to 'A+' from 'A'. ACE Capital Trust II --$300 million capital securities due 2030 to 'A-' from 'BBB+'. ACE American Insurance Company ACE Bermuda Insurance Limited ACE Fire Underwriters Ins. Company ACE Insurance Company of the Midwest ACE Property and Casualty Insurance Company ACE Tempest Reinsurance Limited Agri General Insurance Company Atlantic Employers Insurance Company Bankers Standard Fire & Marine Company Bankers Standard Insurance Company Illinois Union Insurance Company Indemnity Insurance Company of North America Insurance Company of North America Pacific Employers Insurance Company Westchester Fire Insurance Company Westchester Surplus Lines Insurance Company --IFS to 'AA' from 'AA-'. The Rating Outlook is Stable. Fitch has upgraded and withdrawn the following ratings with a Stable Outlook: Combined Insurance Company of America; Combined Life Insurance Company of New York. --IFS to 'AA' from 'AA-'. Contact: Primary Analyst Gretchen Roetzer Director +1-312-606-2327 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst James B. Auden, CFA Managing Director +1-312-368-3146 Committee Chairperson Keith M. Buckley, CFA Managing Director +1-312-368-3211 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Insurance Rating Methodology' (Jan. 11, 2013). Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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