MOODY'S LOWERS RATINGS OF ACE LIMITED (TO A3/PRIME-2 FROM A2/PRIME-1) AND CERTAIN SUBSIDIARIES; OUTLOOKS ARE STABLE
Moody’s Investors Service has lowered the long-term and short-term debt ratings of ACE Limited and ACE INA Holdings, Inc. (senior unsecured long-term debt to A3 from A2, short-term debt to Prime-2 from Prime-1), as well as of Capital Re LLC (backed securities to A3 from A2) and ACE Capital Trusts I, II, III and IV (trust preferred securities to Baa1 from A3) and the insurance financial strength ratings of members of the run-off Brandywine Group (to Ba3 from Baa3). The current rating action concludes a review commenced on January 27, 2003 following the company’s announcement that it had increased its estimate of gross ultimate environmental and asbestos-related insurance liabilities by $2.2 billion, resulting in a net after-tax charge to earnings of $354 million in the fourth quarter of 2002.
Moody’s noted that its ratings and stable outlooks on other rated entities within the ACE Group were affirmed at the time of the initiation of the rating review and are not affected by the current rating action. These include ratings on the active members of the ACE USA Group intercompany pool (insurance financial strength at A2), Westchester Specialty Group (insurance financial strength at A3), ACE Bermuda Insurance Ltd. (insurance financial strength at Aa3), ACE Global Markets (insurance financial strength at Aa3), ACE Capital Re (insurance financial strength at Aa3), and ACE Guaranty Corp. (insurance financial strength at Aa2).
According to Moody’s, the rating downgrades are based on three key factors: 1) the sharply increased magnitude of the group's exposure to asbestos-related liabilities - as evidenced by the completion of updated internal and external actuarial reviews; 2) the group's related heightened exposures to reinsurance counterparty risk - as a result of large cessions to reinsurers; and 3) ACE Limited's still somewhat elevated tangible leverage profile and weaker interest and dividend coverage levels relative to Moody's expectations at the prior rating level. The rating agency noted, however, that robust improvements in pricing for insurance and reinsurance coverages, together with a tightening of contractual terms and conditions, should bode well for ACE Group's prospective cash flow and earnings capacity.
With respect to the ACE Limited's and its subsidiaries' debt ratings Moody's noted that in addition to the recent asbestos-related charges, ACE's earnings have been constrained in recent years by a soft market in property/casualty insurance and reinsurance - particularly in the commercial and specialty classes in which ACE's operations are concentrated, and by catastrophe losses (including the events of September 11, 2001) and investment-related write-downs. Internal capital generation has consequently been considerably less in recent years than Moody's prior expectations, and ACE's financial leverage profile, although considerably reduced since the time of the acquisition of CIGNA Corp.'s property/casualty operations, has remained higher than Moody's had expected at the prior rating levels. The rating agency added that although most of the group's combined exposure to mass tort liability claims and reinsurance recoverables reside at the Brandywine Group, to which ACE may have limited contractual liability to support, Moody's continues to see the parent company as being exposed to the fortunes of these operations.
With respect to the Brandywine Group ratings, Moody's noted that these subsidiaries comprise the vast majority of the group's exposures to environmental, asbestos and other mass tort liabilities. Although certain protective features were established at the time of the separation of these units from the active members of the US insurance group prior to their acquisition by ACE - including 1) the establishment of a large stop-loss reinsurance cover with a highly rated and substantially capitalized reinsurer, 2) a dividend retention fund to prevent the voluntary decapitalization of the Brandywine companies, and 3) an excess reinsurance cover provided by their active company affiliates, Moody's noted that these resources have been substantially exhausted by the recent reserve additions, thereby reducing the extent of protection against potential further deterioration. Although somewhat more than $400 million of reinsurance protection for the Brandywine companies remains outstanding from the active members of the ACE USA group, Moody's views ACE USA's capitalization as being constrained by capital needs to support its own underwriting, investment and general business risks, and therefore views ACE's commitment to provide support for Brandywine beyond its contractual obligations, to be limited. The significant decrease in protective margin for Brandywine, together with its heightened exposure to reinsurance recoverables - which Moody's views as having a somewhat weaker credit profile than those supporting ACE's active underwriting operations, and the potential for limited further financial support for Brandywine by ACE - contributed to the multi-notch downgrade for Brandywine.
Moody's also noted that, despite ACE 's recent reserve action considerable uncertainty remains with respect to the ultimate outcome of these liabilities. The rating agency added that insurers' estimates for asbestos-related claim liabilities have recently increased significantly as a result of bankruptcies among major manufacturers, a broadening of litigation to include peripheral defendant classes, and an expanded range of coverages being asserted, among other factors. Although the prospect of tort reform remains a possibility, the benefits of such efforts have yet to materialize.
The following ratings have been lowered:
ACE Limited - senior unsecured debt to A3 from A2 (shelf to (P)A3 from (P)A2); subordinated debt to Baa1 from A3 (shelf to (P)Baa1 from (P)A3), preferred stock to Baa2 from Baa1 (shelf to (P)Baa2 from (P)Baa1), rating for commercial paper to Prime-2 from Prime-1;
ACE INA Holdings, Inc. (debts unconditionally guaranteed by ACE Limited) - senior unsecured debt to A3 from A2 (shelf to (P)A3 from (P)A2); subordinated debt to Baa1 from A3 (shelf to (P)Baa1 from (P)A3), rating for commercial paper to Prime-2 from Prime-1;
Capital Re LLC - backed securities to A3 from A2;
ACE Capital Trust I - capital securities to Baa1 from A3;
ACE Capital Trust II - capital securities to Baa1 from A3;
ACE Capital Trust III - capital securities shelf to (P)Baa1 from (P)A3;
ACE Capital Trust IV - capital securities to (P)Baa1 from (P)A3;
Members of the Brandywine Group:
ACE American Reinsurance Company - insurance financial strength to Ba3 from Baa3;
Century Indemnity Company - insurance financial strength to Ba3 from Baa3;
Century Reinsurance Company - insurance financial strength to Ba3 from Baa3.
The ACE Group of Companies provides insurance and reinsurance for a diverse group of clients. The ACE Group conducts its business on a global basis with operating subsidiaries in nearly 50 countries. For the full year 2002, ACE Limited reported gross written premiums of $12.7 billion and net income of $77 million. As of December 31, 2002, ACE Limited reported shareholders’ equity of $6.4 billion.
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