UPDATE 1-ACE signs letter-of-credit pact with Deutsche Bank

* Permits ACE to issue up to $500 mln of letters of credit

* Pact bolsters ACE's capacity to manage exposure to risk

* Shares fractionally higher

NEW YORK, June 18 (Reuters) - ACE Ltd (ACE.N) has entered into a five-year agreement with Deutsche Bank (DBKGn.DE) that permits the insurer to issue up to $500 million of letters of credit, ACE said in a regulatory filing on Thursday.

The pact will supplement existing agreements and bolster ACE's capacity to manage its exposure to risk in the face of higher financial market volatility and increased catastrophe severity that might occur in the near term, the company said.

The covenants in the agreement are similar those in other ACE group credit facilities and include limitations on liens, asset sales and mergers, the U.S. Securities and Exchange Commission filing said.

ACE shares were up 20 cents at $43.18 in morning trade on the New York Stock Exchange. (Reporting by Vikram S Subhedar, editing by John Wallace)