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18 Jun 1999
MOODY'S RATES ACE LIMITED PRIME-1 FOR COMMERCIAL PAPER; ASSIGNS (P)A2 SENIOR RATING TO SHELF REGISTRATION
Moody's Investors Service has assigned first-time ratings to the US$ 4 billion shelf registration (prospective senior debt at (P)A2) and the US$ 2.8 billion commercial paper program (Prime-1) of ACE Limited. Other prospective ratings assigned include a (P)"a2" rating for preferred stock/capital securities, and a (P)A3 rating for subordinated debt. Several of these ratings also apply to commercial paper and prospective debt and preferred stock offerings of other ACE funding vehicles, based on unconditional and irrevocable guarantees provided by ACE Limited. Proceeds from issuances under these programs will be used primarily to fund the acquisition of CIGNA's property and casualty insurance operations, which is expected to close in early July. Funding for the $3.45 billion acquisition will initially consist of a combination of internal cash and commercial paper, which will be fully supported by committed bank lines. Take-out financing -- which Moody's expects to be completed during the third quarter of 1999 -- will consist of a combination of common equity, trust preferred securities, mandatory convertible preferred securities, and senior debt.
According to Moody's, ACE Limited's ratings consider the company's successful underwriting and operating strategy in an increasingly diverse array of property/casualty insurance and reinsurance businesses, the strong market profile - particularly in its core excess liability insurance, property catastrophe reinsurance, and Lloyd's businesses - of most of its subsidiary operations, as well as its earnings strength and increased business and risk diversification. The strong liquidity and capitalization of the consolidated group and of ACE's principal subsidiaries, and its experienced senior management were also cited as characteristics supportive of the ratings. The rating agency added that modest dividend restrictions on Bermuda-domiciled insurers provide ACE Limited with enhanced liquidity, relative to more restrictive standards for on-shore holding companies. Moody's noted that on a post-acquisition basis the company's principal Bermudian subsidiaries - ACE Bermuda, CODA and Tempest Re - will together hold approximately $1.8 billion of the group's consolidated equity capital.
Moody's noted, however, that these fundamental strengths are tempered somewhat by the fundamental underwriting volatility of its Bermuda-based excess liability insurance and property catastrophe reinsurance operations, by management challenges and financial risks associated with the group's rapid acquisition-driven international expansion, by its sharply increased leverage profile and debt service burden following the primarily debt-financed acquisition of CIGNA's property and casualty insurance operations, and by challenges inherent in improving the prospective operating performance of that operation, particularly in light of continued weak pricing conditions in the US commercial lines insurance marketplace. Although in earlier years ACE did not purchase reinsurance and retrocessional protection, it has recently done so in order to lower its net underwriting risk retention and to reduce the volatility of its underwriting results and capitalization.
ACE Limited, domiciled in the Cayman Islands and headquartered in Bermuda, was established in 1985 by a number of large US-based corporations as a mutual-like provider of excess liability and directors' and officers' insurance - through A.C.E. Insurance Company (now called ACE Bermuda Insurance Company). Since its initial public offering in 1993, ACE has expanded and diversified its operations into corporate directors' and officers' insurance (CODA), property/catastrophe reinsurance (Tempest Reinsurance Company), the Lloyd's market (ACE Underwriting Agencies Limited - including the former Methuen, Ockham, Tarquin and Charman operations), and property and casualty insurance in the USA (ACE USA / Westchester Specialty Group) through wholly-owned subsidiaries. The company also intends to enter the financial guaranty reinsurance market with the pending acquisition of Capital Reinsurance Co., which is expected to close the third quarter of 1999. In addition to its wholly-owned businesses, ACE has also expanded its underwriting presence through joint ventures, most notably in political risk insurance through Sovereign Risk Insurance Ltd.
Expanding on its rating rationale, Moody's noted that ACE Bermuda, Tempest Re, and the Charman operations at Lloyd's are leaders in each of their respective markets. ACE Bermuda was one of the two original Bermudian excess liability insurers, and today writes a diverse array of coverages, including aviation and satellite, excess property, financial lines and directors' and officers' liability. Tempest Re, one of the original Bermudian monoline property catastrophe reinsurers, likewise maintains a strong market profile, and along with the acquisition in 1998 and recent amalgamation of CAT Limited, has diversified its business to provide more sophisticated option and multi-year/multi-trigger coverages. In its ACE Global operations, the combination and merger of the Methuen, Ockham, Tarquin, and Charman operations has made the company a leading underwriting manager and corporate capital provider in the Lloyd's market. Finally, the pending acquisition of CIGNA's US and international property casualty insurance operations will make ACE USA one of the twenty leading insurers and one of the ten largest predominantly commercial lines insurers in the USA, and also will provide the group with a significant international presence.
Moody's noted that despite their strong competitive positions, each of these operations faces considerable challenges, given intensely competitive pricing and underwriting conditions in their respective markets. The rating agency added, however, that the group's improved business and risk diversification should provide it with some flexibility to manage its growth and to direct capital resources and underwriting capacity toward business segments that present relatively more attractive opportunity.
Moody's added that the outlook for ACE's ratings is stable. The rating agency indicated that future rating activity will likely be driven by several factors, including 1) management's ability to improve the operating performance of the to-be-acquired CIGNA P&C operations, which will form the core of its U.S. and international underwriting strategy; 2) the sustainability of ACE's earnings strength, capitalization and risk management discipline at each of its other Bermuda and Lloyd's operations; 3) the quality of future acquisitions or business expansion initiatives and the related funding structures; and 4) ACE Limited's ability to maintain or reduce its financial leverage. Significantly, effective on the date of closing, CIGNA's run-off "Brandywine" insurance operations will benefit from a $1.25 billion stop-loss reinsurance program provided by a high quality reinsurer.
Ratings assigned, including prospective ratings, are as follows:
ACE Limited - commercial paper program at Prime-1, prospective senior debt at (P)A2, prospective subordinated debt at (P)A3, prospective preferred stock at (P)"a2";
ACE INA Holdings Inc. - guaranteed commercial paper program at Prime-1, prospective senior debt at (P)A2, prospective subordinated debt at (P)A3;
ACE Capital Trust I - prospective trust preferred securities at (P)"a2";
ACE Capital Trust II - prospective trust preferred securities at (P)"a2";
ACE Capital Trust III - prospective trust preferred securities at (P)"a2".
ACE Limited (NYSE: ACL), domiciled in the Cayman Islands and headquartered in Hamilton, Bermuda is engaged in property and casualty insurance and reinsurance through its subsidiaries based in Bermuda, the United States, the Republic of Ireland and the Lloyd's of London market. As of March 31, 1999, ACE Limited reported gross premiums written and operating income of $690 million and $220 million, respectively, for the first six months of its fiscal year, and total assets and shareholders' equity of approximately $8.9 billion and $4.0 billion, respectively.
No Related Data.
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