The ratings downgraded in today's action include long-term and short-term debt ratings of ACE Limited and ACE INA Holdings, Inc. and the insurance financial strength ratings of members of the run-off Brandywine Group.
Moody's pushed the senior unsecured debt rating of ACE Limited down to "A3" from "A2," while dropping Brandywine's financial strength rating to "Ba3" from "Baa3."
Today's action did not affect the following ratings, which were affirmed in January:
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The "A2" insurance financial strength rating of the active members of the ACE USA Group intercompany pool.
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The "A3" insurance financial strength rating of Westchester Specialty Group.
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The "Aa3" insurance financial strength ratings of ACE Bermuda Insurance Ltd., ACE Global Markets, and ACE Capital Re
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The "Aa2" insurance financial strength rating for ACE Guaranty Corp.
Moody's started reviewing all the ratings on Jan. 27, 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.
In its announcement, Moody's said today's downgrades are based on three key factors—the "sharply increased magnitude" of the group's exposure to asbestos-related liabilities, "the group's related heightened exposures to reinsurance counterparty risk, and ACE Limited's "somewhat elevated tangible leverage profile" relative to Moody's expectations at the prior rating level.
The rating agency did note, 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 Brandywine, Moody's took note of certain protective features set up at the time of the separation of the Brandywine units from the active members of the U.S. insurance group (prior to their acquisition by ACE). The protections included a large stop-loss reinsurance cover from a–well-capitalized reinsurer and an excess cover from the active company affiliates.
But, going on to explain the multi-notch downgrade for Brandywine, the rating agency also said 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," Moody's said.