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ACE Ltd. Will Benefit from AIG's Decline

One insurance company that does not need assistance from the Federal Reserve is ACE Limited, which has managed to sidestep the financial meltdown befallen competitor AIG.

Investment-grade credit ratings and a financial stable balance sheet suggest the company can weather the systemic risk resulting from the ongoing financial meltdown, and even expand its global footprint by capturing business and clients from a faltering AIG. Although recent hurricanes could force ACE to increase its reserve-loss ratio, the collapse of AIG could moderate recent softness in premium rates (due to excess underwriting capacity).

Potential problems related to the current credit crisis appear limited. As of the second-quarter ended June 30, the company held approximately $28 million in credit-related impairments and $1.6 billion, or 3.7 percent of total assets, were of questionable value (Level 3 inputs). In addition, sub-prime portfolio represented less than one percent of the company's investment portfolio and ACE held no collateralized debt obligations or collateralized loan obligations.

A review of the second-quarter 10-Q regulatory filing, however, suggests some troubling legacy asbestos exposure from prior acquisitions:

  • Certain ACE entities are primarily liable for asbestos, environmental, and other exposures that they have reinsured to Century Insurance Group. Accordingly, if Century were to become insolvent and ACE were to lose control of Century, some or all of the recoverables due to these ACE companies from Century could become uncollectible, yet those ACE entities would continue to be responsible to pay claims to their insureds or reinsureds.
Aggregate reinsurance balances ceded by active ACE companies to Century are approximately $1.5 billion. This means that should Century be unable to cover future payments, ACE could take a hit to share-net and assets if forced to increase its own loss reserves.
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