RPT-Fitch affirms ACE Limited's ratings; outlook stable
Dec 10 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed the ratings of ACE Limited and its subsidiaries (ACE). Fitch has also assigned its 'AA-' Insurer Financial Strength (IFS) rating to ACE Reinsurance (Switzerland) Limited (ARSL), a Switzerland domiciled, wholly owned insurance subsidiary of ACE. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS
The ratings affirmation reflects 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.
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 combined ratio through the first nine months of 2013 was 87.5% versus 90.2% for the same period in 2012, benefitting from improved pricing and underwriting results both in North America and internationally. The full year 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. Recent manageable 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 $2.8 billion and after-tax operating income of $2.4 billion for the first nine months of 2013, up over 42% and 12%, respectively, over the same period in 2012. This result corresponds with an operating return on equity of 12.3% in 2013 and 12.1% in 2012. The increase in net income was due in part to a shift in realized investment gains primarily related to mark-to-market accounting in ACE's life reinsurance segment.
Shareholders' equity has grown over 60% in the past five years including 3% since year-end 2012 to $28.2 billion at Sept. 30, 2013. Tangible equity has grown in conjunction with the growth in shareholders' equity and has more than doubled since 2008. Fitch also notes that, unlike many of its peers, ACE 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 relatively modest $233 million of shares through nine-months 2013, and $7 million for the same period in 2012. ACE recently announced plans to target $1.5 billion in share repurchases in 2014 given ACE's conservative view on acquisition opportunities and the current market conditions that have hindered ACE's organic growth. Fitch views repurchases as discretionary and as such, they would be suspended if necessary to preserve capital.
The company's financial leverage ratio was 18%, which is consistent with Fitch's median sector credit factors for the current rating category. An increase in leverage from year-end 2012 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 14.7x through the first nine months of 2013. ACE has ample resources available for debt servicing needs with roughly $2.5 billion of cash and short-term investments at Sept. 30, 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.
The ARSL IFS rating assignment is based on ARSL's position within ACE's organization structure and the integral role it plays in ACE's global risk management business operations, which under Fitch's group rating methodology supports the inclusion of ARSL within the existing ACE group IFS rating. Fitch notes that ARSL's 'AA-'IFS rating is one notch below the ACE group IFS rating of 'AA' due to Fitch's notching guidelines. European reinsurers (including those in Switzerland) operate under what Fitch characterizes as a 'Moderate' regulatory environment, as policyholders do not benefit from any priority in the case of liquidation, but there is a strong capital regime. Due to the lack of policyholder priority, a baseline recovery assumption of 'Average' is used for the IFS rating, and based on standard notching it is aligned with the operating companies' implied IDRs.
Fitch's decision to use its group rating methodology rather than a stand-alone approach is a function of 1) ACE's willingness to provide support to ARSL, including an assessment of ARSL's strategic importance to ACE, and support between group members, and 2) ACE's ability to provide support to ARSL, including an assessment that ACE's financial flexibility and liquidity position allows for shifting of resources throughout the organization as necessary, and consideration of any external barriers that may restrict movement of capital and resources between affiliates.
Fitch considers ARSL to have a 'core' strategic importance to ACE. ARSL is a key and integral part of the group's business and strategy. The company's only role is to act as an internal reinsurer with respect to U.S. business written by other ACE companies. ARSL has demonstrated a history of success in supporting group objectives. Prospects for future success are consistent with that of other core ACE companies, and many synergies and complements exist between ACE's core companies and ARSL.
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 highly-rated peers. Future rating upgrades may also be constrained by sovereign rating considerations.
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.
Additionally, a Fitch downgrade of Bermuda's long-term foreign currency IDR to more than two notches below ACE's IFS rating, may promote consideration of a downgrade in ACE's ratings. 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 assigned the following rating with a Stable Outlook:
ACE Reinsurance (Switzerland) Limited
--IFS at 'AA-'.
Fitch has affirmed the following ratings with a Stable Outlook:
--Issuer Default Rating (IDR) at 'AA-'.
ACE INA Holdings Inc.
--$500 million senior notes due 2014 at 'A+';
--$450 million senior notes due 2015 at 'A+';
--$700 million senior notes due 2015 at 'A+';
--$500 million senior notes due 2017 at 'A+';
--$300 million senior notes due 2018 at 'A+';
--$500 million senior notes due 2019 at 'A+';
--$475 million senior notes due 2023 at 'A+';
--$100 million senior debentures due 2029 at 'A+';
--$300 million senior notes due 2036 at 'A+';
--$475 million senior notes due 2043 at 'A+'.
ACE Capital Trust II
--$300 million capital securities due 2030 at 'A-'.
ACE American Insurance Company
ACE Bermuda Insurance Limited
ACE Fire Underwriters Ins. Company
ACE INA Overseas Insurance Company Ltd.
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 at 'AA'.
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