MOODY'S UPGRADES ACE USA; LEAD COMPANIES TO A2 FROM Baa1
Moody's Investors Service has upgraded its insurance financial strength ratings on members of the ACE USA Group, comprising the US-based subsidiaries of Bermuda-based ACE Limited (NYSE: ACL). Ratings for active members of the Insurance Company of North America (INA) intercompany pool and other substantially-reinsured active affiliates have been upgraded to A2 ("Good") from Baa1 ("Adequate"). Westchester Fire Insurance Company -- which is not pooled or otherwise substantially reinsured on a prospective basis by other major members of the ACE USA Group -- has been upgraded to A3 ("Good") from Baa2 ("Adequate"). Members of the recently acquired "Brandywine" operations - consisting of the discontinued operations (including environmental and asbestos claim runoff liabilities) of the former CIGNA P&C group - have been upgraded to Baa3 ("Adequate") from Ba1 ("Questionable"). The rating outlook for Westchester Fire is positive, because of Moody's expectation that the company will become more financially integrated with other group members in the coming years; the outlooks for all other ratings are stable.
These rating actions complete a review initiated in February 1999 and follow Moody's recent assignment of ratings to the senior debt (rated A2) and commercial paper program (Prime-1) of ACE Limited. Funding for the recently completed $3.45 billion acquisition has initially consisted of a combination of internal cash, commercial paper and senior debt. Additional take-out financing for the commercial paper - which Moody's expects to be complete by early next year - will consist of a combination of common equity, trust preferred securities, and mandatory convertible preferred securities.
According to Moody's the rating upgrades primarily reflect the central role that the newly acquired operations will play in ACE Limited's ongoing expansion in the US and international insurance marketplace, ACE Limited's strong consolidated capitalization and its experienced and capable executive management team, and Moody's expectation that ACE Limited will take aggressive action to strengthen the profitability of ACE USA through a combination of expense reductions and underwriting measures.
Expanding on the rationale for its rating action, Moody's noted that the recent CIGNA P&C acquisition significantly elevates ACE USA's position within the US commercial property and casualty insurance marketplace (to the 14th largest, from the 27th largest, based on pro-forma combined net written premiums of $2.0 billion for 1998) and provides the group with a platform - through an extensive branch office system - for expansion in several international markets. Moody's noted that the newly-acquired international operations have been especially profitable in recent years. Furthermore, the upgrade of the discontinued "Brandywine" insurance operations primarily reflect the implementation - effective on the date of closing (July 2nd, 1999) - of a $1.25 billion stop-loss reinsurance program provided by Aaa-rated National Indemnity Company, a leading US reinsurer and a major subsidiary of Berkshire Hathaway, Inc. Westchester Fire Insurance Company also benefits from substantial stop-loss reinsurance coverage on business written in prior years provided by National Indemnity Company and by ACE Bermuda; Moody's noted, however, that Westchester is not currently a part of the INA pool, a consideration that is reflected in its A3 rating.
Despite these favorable developments, Moody's cautioned that persistent intense competitive conditions for both pricing and terms in the US commercial and specialty lines marketplace will likely constrain ACE USA's ability to generate strong margins on new and renewal business, and that ACE Limited's heighted leverage profile will result in an increased debt service burden on the newly acquired operations. The rating agency added that the stop-loss reinsurance cover - together with existing reserves - provides significant long-term financial flexibility for the runoff "Brandywine" operations, and removes considerable uncertainty with respect to the amount and timing of the companies' loss exposures. Despite these benefits, however, Moody's noted that some uncertainty persists regarding the adequacy of these resources relative to the group's aggregate claim exposures, given inherent uncertainties in the estimation of latent liabilities.
With respect to ACE USA's ultimate parent, Moody's noted that ACE Limited has established a successful underwriting and operating strategy in an increasingly diverse array of property/casualty insurance and reinsurance businesses. The group has established a strong market profile - particularly in various classes of corporate liability insurance, property catastrophe reinsurance, and Lloyd's businesses - enhancing its earnings strength and risk diversification.
Insurance Financial Strength Ratings for the following active members of the ACE USA group have been upgraded to A2 from Baa1:
Allied Insurance Company
Atlantic Employers Insurance Company
Bankers Standard Fire & Marine Company
Bankers Standard Insurance Company
CIGNA Employers Insurance Company
CIGNA Fire Underwriters Insurance Company
CIGNA Indemnity Insurance Company
CIGNA Insurance Company
CIGNA Insurance Company of Illinois
CIGNA Insurance Company of Ohio
CIGNA Insurance Company of Texas
CIGNA Insurance Company of the Midwest
CIGNA Lloyds Insurance Company
CIGNA Property & Casualty Insurance Company
Illinois Union Insurance Company
INA Surplus Insurance Company
Indemnity Insurance Company of North America
Insurance Company of North America
Pacific Employers Insurance Company.
The Insurance Financial Strength Rating of Westchester Fire Insurance Company has been upgraded to A3 from Baa2.
Insurance Financial Strength Ratings for the following inactive members of the ACE USA group have been upgraded to Baa3 from Ba1:
CIGNA Reinsurance Company
Century Indemnity Company
Century Reinsurance Company
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 (through ACE Bermuda, CODA, and Tempest Reinsurance Company), the United States (through ACE USA), and in the Lloyd's and international markets (ACE Global). The company is also in process of entering the financial guaranty reinsurance market with the pending acquisition of Capital Reinsurance Co., which is expected to close the fourth quarter of 1999. In addition to its wholly-owned businesses, ACE Limited also participates in the political risk insurance market through Sovereign Risk Insurance Ltd., a joint venture arrangement. As of June 30, 1999, ACE Limited reported gross premiums written and operating income of $690 million and $220 million, respectively, for the first nine months of fiscal year 1999, and total assets and shareholders' equity of approximately $8.9 billion and $4.0 billion, respectively.
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