A.M. Best Affirms ACE Limited’s FSR
A.M. Best Co. has affirmed the financial strength ratings of the operating subsidiaries of ACE Limited (ACE) (Bermuda). Concurrently, A.M. Best has downgraded ACE Limited’s debt securities and the securities guaranteed by ACE Limited. All ratings have been assigned stable outlooks.
ACE’s senior debt rating was downgraded to “bbb+” from “a”, subordinated notes were downgraded to “bbb” from “a-” and trust preferred securities were downgraded to “bbb-” from “a-“. Additionally, A.M. Best has assigned a “bbb-” rating to ACE’s recently issued $575 million (including over-allotment feature) of cumulative redeemable preferred shares, which carries a coupon of 7.8 percent. The securities are not convertible or exchangeable into ACE common shares and have no stated maturity but may be redeemed after May 2008. The shares are being issued under ACE’s $1.5 billion shelf registration. Proceeds of the preferred stock offering were used to increase surplus and have resulted in appropriate levels of capital in ACE’s subsidiaries commensurate with their respective ratings.
The financial strength ratings reflect ACE’s solid capitalization, diversified earnings and product line, strong competitive position and global name recognition. These strengths are derived from ACE’s focus on operating strategy, disciplined underwriting, conservative reserving methodology and an experienced management team. A.M. Best believes that tightened terms and conditions coupled with continued significant rate increases will allow for the company’s overall earnings potential to manifest itself this year. Those earnings are expected to replenish the company’s capital base, which has been weakened by the 2002 asbestos reserve charge and the 2001 losses from the World Trade Center tragedy. Management was, however, proactive in raising $1.1 billion of equity in 2001 and $575 million of preferred stock in 2002 to maintain appropriate capital levels.
A.M. Best believes that ACE’s overall risk profile – both operationally and financially – is higher than the industry, thus requiring excess capital to support that risk profile. The significant earnings projected for the remainder of 2003, absent higher than expected catastrophes, will work toward restoring the excess capital cushion.
The rating action also considers the $2.2 billion (gross)/$514 million (net) addition to asbestos reserves recorded in 2002, following ACE’s extensive internal and outside actuarial review of asbestos liabilities. A.M. Best has met with management regarding the asbestos study and is comfortable with the adequacy of asbestos reserves. Absent asbestos reserves, ACE has a solid reserving history with minimal adverse development.
Historically, ACE’s financial leverage has been towards the high end of A.M. Best’s range for the company’s debt ratings. The debt rating downgrades reflect this leverage as well as ACE’s holding company cash flow requirements and the weakened, albeit adequate, surplus position of its operating subsidiaries. More than half of ACE’s equity is comprised of goodwill and deferred tax assets, which weaken its quality.
Quality of capital considerations also include ACE’s considerable credit exposure in ACE Financial Services, which is supported by just under 10% of ACE’s consolidated capital. Holding company cash flow requirements – including shareholder dividends – amount to approximately $430 million representing a considerable percentage of projected earnings, which creates a conflict with maintaining capital levels supportive of ACE’s business and risk profile.
A.M. Best expects ACE’s financial leverage and fixed charge cover to improve as projected earnings increase shareholders’ equity and holding company liquidity.