Dec 10 (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
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
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'.