Fitch Rates ACE & Chubb Following Acquisition

January 18, 2016

Following the acquisition of Chubb by ACE, Fitch Ratings has affirmed all the ratings for ACE Limited and its subsidiaries and the Insurer Financial Strength [IFS] ratings for The Chubb Corporation operating subsidiaries.

Fitch has downgraded Chubb’s Issuer Default Rating [IDR] to ‘A+’ from ‘AA-’ and downgraded all other holding company obligations one notch. The Rating Outlook for all ratings is Stable.

The ratings agency said, “ACE’s acquisition of Chubb for roughly $29.5 billion closed Jan. 14, 2016. The combined company is now known as Chubb Limited.

“On July 1, 2015, ACE announced that the company and Chubb had entered into a definitive agreement whereby ACE would purchase all outstanding shares of Chubb with a combination of cash, debt, and equity, or approximately a 30% premium relative to the prior day closing stock price for Chubb.

“Fitch views the transaction favorably due to the increased size and scale of the combined entity which is estimated to write roughly $32 billion in global net premium with a historical five year average combined ratio of near 90%.

“ACE has demonstrated past success in executing successful acquisitions which mitigates integration risk; however, the size and complexity of the Chubb acquisition represents a unique challenge and it will take time to realize the anticipated cost savings from this acquisition.

“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.

“ACE’s North America premium volume will increase to roughly 66% of total net premiums written from 56% as the acquisition adds Chubb’s underwriting portfolio and expertise in several segments, including: professional liability, middle market commercial lines, and personal lines.

“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 $5.3 billion in debt and $15 billion in equity plus cash dividends. Fitch estimates the pro forma financial leverage ratio [FLR] [total debt to capital excluding FAS 115 unrealized gains and losses] at closing has increased to roughly 24%, primarily as a result of the increased debt [both newly issued and assumed from Chubb], which remains consistent with Fitch’s median sector credit factors for the current rating category. Financial leverage is anticipated to decline over time due to near-term debt maturities and future retained earnings growth.

“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.”

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