Fitch Affirms ACE Limited’s Ratings; Outlook Remains Positive [Professional Services Close – Up]

Following Fitch Ratings' standard review process, Fitch has affirmed the ratings of ACE Limited and its subsidiaries (collectively, ACE).

The Rating Outlook is Positive. A complete list of ratings follows below.

The rating actions reflect ACE's continued strong operating performance, balance sheet and financial flexibility, and diverse sources of revenues and earnings. Partially offsetting these positives is the effect of modestly rising accident-year combined ratios and the effect of continued significant competition in the company's chosen markets.

Fitch expects that ACE's insurance and reinsurance losses from Hurricane Sandy will be more of an earnings event rather than a capital event. While the amount of loss is uncertain at this early stage, Fitch anticipates the level to be manageable given the company's diverse global book of business, strong capitalization and operating performance with below average catastrophe losses through the first nine months of 2012, and conservative risk management.

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 percent for nine consecutive years.

The year-to-date combined ratio was 90.2 percent at Sept. 30, despite experiencing $147 million of pre-tax crop insurance losses in the third quarter and $127 million of pre-tax catastrophe losses including reinstatements through nine months ending 2012. ACE reported a higher combined ratio of 95.3 percent for the same period in 2011 due to $744 million of catastrophe losses.

ACE reported net income of $1.94 billion and operating income of $2.1 billion for the first nine months of 2012, up from $805 million and $1.7 billion, respectively, for the same period in 2011. The increase in net income was largely due to reduced catastrophe losses and a shift in realized investment losses primarily related to mark to market accounting in ACE's life reinsurance segment.

ACE has steadily grown its ordinary shareholders' equity with solid earnings. As a result, shareholders' equity has increased by over 50 percent since year-end 2007 and 11 percent since year-end 2011 to $27 billion through Sept. 30. Tangible equity has grown in conjunction with the growth in shareholders' equity and has more than tripled since 2001. Fitch also notes that ACE, unlike many of its peers, 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. No shares were repurchased during the third quarter of 2012.

Additionally, Fitch has affirmed and withdrawn Century Indemnity Company's (Century) Insurer Financial Strength (IFS) rating. The rating of the ACE subsidiary is no longer considered by Fitch to be relevant to the agency's coverage. Fitch's rating on Century reflects Fitch's view that the company's importance to ACE is limited due to its run-off status and thin capitalization. Century maintains inactive operations largely consisting of asbestos and environmental (A&E) reserves that are in run-off.

Key rating triggers that may lead to an upgrade include continued strong operating performance with a combined ratio consistently under 95 percent, continued stockholders' equity growth, and maintaining a track record of successful acquisition execution while managing financial leverage to under 25 percent total debt to capital and run-rate leverage at or under 20 percent. Fitch expects operating earnings-based interest and preferred dividend coverage to remain at or above 10x, and for ACE's retention ratio (net premium written to gross premium written) to increase over time to be more in line with higher-rated peers.

Key rating triggers that may lead to a downgrade include a sustained material deterioration in operating performance such that the combined ratio is consistently unprofitable at over 100 percent, a significant reduction in stockholders' equity that is not recovered in the near term, and financial leverage consistently over 30 percent.

Potential for future acquisitions and the associated integration risks and company profile changes could lead to pressure on the ratings, depending on the acquisition details.

Fitch has affirmed the following ratings:

ACE Limited

--Issuer Default Rating (IDR) at 'A+'.

ACE INA Holdings Inc.

--IDR at 'A+';

--$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';

--$100 million senior debentures due 2029 at 'A';

--$300 million senior notes due 2036 at 'A'.

ACE Capital Trust II

--$300 million capital securities due 2030 at 'BBB+'.

ACE American Insurance Company

ACE Bermuda Insurance Limited

ACE Fire Underwriters Ins. Company

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

Combined Insurance Company of America

Combined Life Insurance Company of New York

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-'.

Fitch has affirmed and withdrawn the following rating:

Century Indemnity Company

--IFS at 'B-'.

The Rating Outlook is Positive.

Additional information is available at 'fitchratings.com'.

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