A.M. Best Co. has affirmed the financial strength rating of A (Excellent) and the issuer credit rating of "a+" of Combined Insurance Company of America (Glenview, IL) and Combined Life Insurance Company of New York (Latham, NY) (Combined companies), subsidiaries of ACE Limited (ACE).

The outlook for all ratings is stable.

The rating affirmations of the Combined companies reflect their consolidated financial strength and operating profile, established niche in the middle-income market for supplemental individual accident and health products, and the organization's reduced expense structure. The Combined companies maintain an established presence in the rural supplemental individual accident and health market, both in the United States and abroad. The Combined organization has various international subsidiaries and branches in Canada and Europe. A.M. Best believes the Combined companies are a strategic fit within the ACE organization.

The Combined companies continue to report favorable statutory earnings in core business lines; however, these earnings should diminish as the Combined organization continues to merge some of its foreign branches with other ACE companies. The Combined companies maintain good risk-adjusted capitalization, and the level of capital is more than adequate to withstand near-term earnings decline. Additionally, the organization has aggressively focused on reducing its expenses through operating efficiency initiatives, which has contributed to the lower combined expense ratio at the lead company, Combined Insurance Company of America.

Offsetting factors include the Combined companies' product line concentration in supplemental health coverages, the high costs associated with their current distribution method, and anticipated contracting group size. The Combined companies' product distribution system creates both unique and competitive advantages; however, the organization's career agency distribution system, which focuses its efforts primarily in rural areas, has a relatively high expense structure in comparison with other distribution methods. Subsequent to the mergers of their profitable foreign branches with other existing ACE subsidiaries, the Combined companies are expected to experience a decrease in direct premiums written over the near term, and its sales efforts will be concentrated solely on North America. Despite a strong niche market position, A.M. Best believes there will be top-line challenges from weak economic conditions.

The key rating drivers that may trigger upward movement in the Combined companies' ratings include a sustained earnings trend at both companies, stronger risk-based capital maintained at Combined Insurance Company of America and a greater strategic importance to the parent company.

Key rating drivers that may trigger negative movement in the ratings include a sustained revenue decline and capital levels falling below A.M. Best's expectations, regulatory actions that may prohibit growth, or a less strategic importance to the companies' ultimate parent, ACE.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: "Evaluating Country Risk"; "Risk Management and the Rating Process for Insurance Companies"; "Understanding BCAR for Life/Health Insurers"; and "Rating Members of Insurance Groups." Best's Credit Rating Methodology can be found at ambest.com/ratings/ methodology.

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