Fitch Affirms ACE Ltd.’s Ratings Following Rain & Hail Acquisition Announcement; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the ratings of ACE Limited and its subsidiaries (collectively, ACE) following the company's announcement that it will acquire all of the outstanding common stock of Rain and Hail Insurance Service, Inc. (R&H) not currently owned by ACE for roughly $1.1 billion in cash. The transaction is expected to close by the end of 2010, pending necessary regulatory approvals. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.

Fitch's affirmation reflects its belief that ACE's capitalization will be materially unchanged by the acquisition, the integration risk derived from the transaction is manageable, and that R&H, the second largest crop insurer in the U.S., provides strategic benefits for ACE. The relationship between ACE and R&H dates back to 1980 and since 1999, ACE has owned roughly 20% of the company's outstanding common stock.

Upon acquisition closing, Fitch expects to assign an 'AA-' Insurer Financial Strength (IFS) rating to R&H's insurance operating subsidiary, Agri General Insurance Company (AGIC), based on ACE's group rating methodology and due to the planned inclusion of AGIC within the ACE American pool group. Fitch's view is that the acquired entity will be a core operation to ACE's global operations. Fitch also believes that AGIC's financial and business profile will benefit from ownership by a very strong owner with a long term, global strategy centered on underwriting insurance risks.

Fitch anticipates that ACE will primarily use internal capital to finance the proposed acquisition with cash on hand. Fitch notes that ACE reported June 30, 2010 year-to-date earnings of $1.4 billion and that stockholders' equity increased roughly 30% since June 30, 2009. Fitch also notes that ACE, unlike many of its peers, has not repurchased shares during the current soft market.

ACE's acquisition of R&H will result in a meaningful increase in the size of the company's agriculture business. The percentage of pro forma expected net premiums written from agriculture business would increase to 10% from 4%, resulting in an additional $900 million in additional net retained premium volume in 2011 from business with a five-year average combined ratio of a profitable 73%. Execution risk is mitigated in part by ACE's existing knowledge of this business stemming from its current partial ownership of R&H, and by ACE's track record of supplementing growth through diversifying acquisitions. Additionally, Fitch expects that ACE will operate R&H as a stand-alone company, with continuity of management and brand, which Fitch believes further reduces integration risk.

The ratings continue to reflect ACE's recent strong operating performance, solid 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.

Rating drivers that may lead to an upgrade include consistent strong operating performance with a combined ratio consistently under 95%, material stockholders' equity growth, and a continued track record of successful acquisition execution while maintaining financial leverage under 25% total debt to capital.

Rating drivers that may lead to a downgrade include a sustained material deterioration in operating performance such that the combined ratio is consistently over 100% (unprofitable), a significant reduction in stockholders' equity that is not recovered in the near term, and financial leverage consistently over 30%.

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

Fitch has affirmed the following ratings with a Stable Outlook:

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';

--$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 Indemnity Insurance Company

ACE Insurance Company of the Midwest

ACE Property and Casualty Insurance Company

ACE Tempest Reinsurance Limited

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

--Insurer Financial Strength Ratings (IFS) at 'AA-'.

Century Indemnity Company

--IFS at 'B-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Aug. 13, 2010);

--'Non-Life Insurance Rating Methodology' (March 24, 2010);

--'Fitch's Approach to Rating Insurance Groups' (March 24, 2010);

--'Equity Credit for Hybrids and Other Capital Securities' (Dec. 29, 2009);

--'Rating Hybrid Securities' (Dec. 29, 2009).

Applicable Criteria and Related Research:

Non-Life Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506369

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547766

Equity Credit for Hybrids & Other Capital Securities - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112

Rating Hybrid Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings, New York
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com
or
Primary Analyst:
Gretchen Roetzer, +1-312-606-2327
Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Mark E. Rouck, CPA, CFA, +1-312-368-2085
Senior Director
or
Committee Chairperson:
James B. Auden, CFA, +1-312-368-3146
Managing Director

Source: Fitch Ratings