ACE Ltd. yesterday had its debt ratings downgraded by agency A.M. Best, citing the Bermuda-based insurer's high risk profile and potential exposure to asbestos claims.

But Best affirmed the financial strength ratings of the operating subsidiaries of ACE., saying rising insurance premiums rates were likely to improve the company's earnings and replenish the company's capital base, which had been depleted by a 2002 asbestos reserve charge and the 2001 losses from the World Trade Center tragedy.

Best downgraded ACE's senior debt rating to “bbb+” from “a”, its subordinated notes to “bbb” from “a-” and its trust preferred securities to “bbb-” from “a-”. A.M. Best also assigned a “bbb-” rating to ACE's recently issued $575 million in preferred shares.

“A.M. Best believes that ACE's overall risk profile - both operationally and financially - is higher than the industry, thus requiring excess capital to support that risk profile,” the agency said. “The significant earnings projected for the remainder of 2003, absent higher than expected catastrophes, will work towards restoring the excess capital cushion.” Best said it also considered the $2.2 billion (gross)/$514 million addition to asbestos reserves recorded in 2002, adding it had was comfortable with the adequacy of asbestos reserves. “Historically, ACE's financial leverage has been towards the high end of A.M. Best's range for the company's debt ratings,” the agency said. “The debt rating downgrades reflect this leverage as well as ACE's holding company cash flow requirements and the weakened, albeit adequate, surplus position of its operating subsidiaries. More than half of ACE's equity is comprised of goodwill and deferred tax assets, which weaken its quality.”