Fitch Affirms ACE Ltd & Chubb’s IFS Ratings Following Acquisition; Downgrades Chubb Holding Company
KEY RATING DRIVERS
ACE's acquisition of Chubb for roughly
Fitch views the transaction favorably due to the increased size and scale of the combined entity which is estimated to write roughly
The combined company's rating strengths include a strong balance sheet position and financial flexibility with moderate leverage and diverse sources of revenues and earnings with the advantages of increased global size and scale and strong management teams.
The rating downgrade of Chubb's holding company and debt ratings reflects technical consideration under Fitch's criteria as the former Chubb holding company received narrower notching due to larger committed holding company cash levels and higher operating interest coverage than the holding company of the newly combined companies. The ratings now align with the new parent and reflect Chubb's core status.
Both ACE and Chubb's operating performance consistently exceeds peers, characterized by low combined ratios with manageable catastrophe losses, consistent favorable loss reserve development and stable investment income from strong operating cash flow. For the five-year period 2010 - 2014, ACE's average GAAP combined ratio was 91% and the operating return on equity was 12%. Chubb's average combined ratio and return on equity was 91% and 13%, respectively.
To fund this transaction ACE raised
Operating interest coverage (excluding realized investment gains) was favorable and consistent at roughly 15x through nine months 2015 and in both 2014 and 2013. Post-acquisition, Fitch expects coverage to be lower in the high-single digits due to higher near-term debt levels and interest expense. The new combined entity is anticipated to have favorable debt servicing capacity from operating subsidiary dividend capacity, earnings, and other liquidity sources.
RATING SENSITIVITIES
Key current rating triggers that may lead to an upgrade include:
--Given increased market position size and scale, demonstration of continued strong operating performance consistent with the individual performance of the former ACE and Chubb entities;
--A reduction in financial leverage to a run-rate level of approximately 20%;
--Operating earnings-based interest and preferred dividend coverage approximating 15x;
Key rating triggers that may lead to a downgrade include:
--A material deterioration in operating performance such that the combined ratio is consistently less profitable at over 95%;
--A significant reduction in stockholders' equity that is not recovered in the near term;
--Increase in financial leverage ratio to a sustained level of over 27%;
--Failure to execute acquisition integration plans as expected resulting in material economic impact on the company.
Fitch has affirmed the following ratings with a Stable Outlook:
ACE Limited
--Issuer Default Rating (IDR) at 'A+'.
--IDR at 'A+';
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ACE Capital Trust II
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ACE Fire Underwriters Ins. Company
ACE Reinsurance (
Bankers
Indemnity Insurance Company of
Insurance Company of
Chubb Insurance Company of
Chubb Insurance Company of
Federal Insurance Company
Texas
--IFS at 'AA'.
Fitch has downgraded the following ratings and removed the ratings from Negative Watch:
The Chubb Corporation
--IDR to 'A+' from 'AA-';
--5.75% senior notes due
--6.6% notes due
--6.8% debentures due
--6.0% senior notes due 2037 to 'A' from 'A+';
--6.5% senior notes due
--6.375% junior subordinated debentures due 2067 to 'BBB+' from 'A-';
--Short-term IDR to 'F1' from 'F1+';
--Commercial paper to 'F1' from 'F1+'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Insurance Rating Methodology (pub.
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172
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