Fitch Affirms ACE's IFS Following Chubb Acquisition Announcement; Places Debt Ratings on Watch Neg

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed the 'AA' Insurer Financial Strength (IFS) ratings of ACE Limited's ACE insurance subsidiaries with a Stable Rating Outlook. Fitch has also placed the ACE holding company ratings, including the 'AA-' Issuer Default Rating (IDR) and 'A+' senior debt rating on Rating Watch Negative. A complete list of ratings follows at the end of this release.

Fitch last affirmed all of ACE's ratings with a Stable Outlook on March 9, 2015.

KEY RATING DRIVERS

Fitch's rating action follows the announcement today that ACE and The Chubb Corporation (Chubb; 'AA' IFS) have entered into a definitive agreement whereby ACE will purchase all outstanding shares of Chubb for $28.3 billion with a combination of cash, debt, and equity, or approximately a 30% premium relative to yesterday's closing stock price for CB. The acquisition is expected to close in the first quarter of 2016, subject to regulatory and shareholder approvals.

Fitch's affirmation of ACE's IFS ratings reflect a proposed combination of two large insurance organizations with strong, well-capitalized operating franchises, and a history of favorable underwriting performance and profitability. ACE's North America premium exposure will increase to roughly 66% of total net premiums written from 56% as the acquisition adds Chubb underwriting portfolio and expertise in several segments, including: professional liability, middle market commercial lines, and personal lines.

Both ACE's 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 consolidated GAAP combined ratio was 91% and the operating return on equity was 12%. Chubb's average combined ratio and operating return on equity for the same period was 91% and 13% respectively.

The Rating Watch Negative relating to ACE's holding company and debt ratings reflects pending changes in Fitch's technical notching criteria, as well as the company's higher pro forma financial leverage and lower interest coverage post-acquisition.

ACE's debt ratings benefit from narrower notching relative to the IFS ratings due to ACE's significant amount of capital, dividends, and earnings held and generated in Bermuda, which is heading towards a Solvency 2-style group regulation approach. Post-acquisition, ACE will be less Bermuda-focused and have an increased U.S. market presence. Under the proposed notching criteria changes, holding companies with U.S. focused operations or assets and capital distributed widely across multiple countries are more likely to maintain a traditional three notch difference between IFS ratings and holding company senior debt ratings.

ACE's financial leverage ratio (FLR) (total debt to capital excluding FAS 115 unrealized gains and losses) as of March 31, 2015 was 19.9%, which included nearly $2 billion of pre-funded debt to be repaid in 2015, 2017, and 2018. Fitch estimates the pro forma FLR at closing will increase to roughly 26% primarily as a result of increased debt (both newly issued and assumed from Chubb) which remains consistent with Fitch's median sector credit factors for the current rating category. After the repayment of $700 million pre-funded debt in November 2015, the pro forma FLR would decrease to 25%. Financial leverage is likely to decline due to near term debt maturities and future retained earnings growth.

ACE's operating interest coverage (excluding realized investment gains) was favorable at approximately 15x 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 and other liquidity sources.

While ACE has demonstrated past success in executing successful acquisitions, Fitch believes there is significant uncertainty related to integration risk and realization of anticipated cost savings from a transaction of this magnitude.

Resolution of the Rating Watch is anticipated to coincide with the closing of the transaction, or implementation of Fitch's new notching criteria. Fitch recently published an exposure draft of proposed changes to insurance notching criteria. Fitch notes that, regardless of the transaction, if the new notching criteria proposed by Fitch are made final, Fitch would expect to downgrade ACE's IDR, debt, and hybrid ratings by one notch. Additionally, Fitch expects to upgrade operating subsidiary ACE Reinsurance (Switzerland) Limited's IFS rating by one notch to 'AA', reflecting anticipated notching criteria changes.

RATING SENSITIVITIES

Fitch expects to update rating sensitivities upon acquisition closing. Key current rating triggers that may lead to an upgrade include:

--Generating a combined ratio consistently under 85%;

--Maintained growth in stockholders' equity that corresponds with premium and asset growth;

--A reduction in financial leverage to a run-rate level of 15% or lower;

--Operating earnings-based interest and preferred dividend coverage at or above 15x;

--Movement in ACE's retention ratio (net premium written to gross premium written) to increase over time to be more in line with highly-rated peers;

--Continuing a track record of successful acquisition execution.

Key rating triggers that may lead to a downgrade include:

--A sustained 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;

--Increases in financial leverage to a sustained level of over 25%.

Any future acquisitions and the associated integration risks and company profile changes could lead to pressure on the ratings, upward or downward, depending on the nature and size of the acquisition and corresponding integration risks.

Fitch has affirmed the following ratings with a Stable Outlook:

ACE American Insurance Company

ACE Bermuda Insurance Limited

ACE Fire Underwriters Ins. Company

ACE INA Overseas Insurance Company Ltd.

ACE Insurance Company of the Midwest

ACE Property and Casualty Insurance Company

ACE Tempest Reinsurance Limited

Agri General Insurance Company

Atlantic Employers Insurance Company

Bankers Standard Fire & Marine Company

Bankers Standard Insurance Company

Illinois Union Insurance Company

Indemnity Insurance Company of North America

Insurance Company of North America

Pacific Employers Insurance Company

Westchester Fire Insurance Company

Westchester Surplus Lines Insurance Company

--IFS at 'AA'.

ACE Reinsurance (Switzerland) Limited

--IFS at 'AA-'.

Fitch has placed the following ratings on Rating Watch Negative:

ACE Limited

--IDR at 'AA-'.

ACE INA Holdings Inc.

--IDR at 'AA-';

--$700 million senior notes due 2015 at 'A+';

--$500 million senior notes due 2017 at 'A+';

--$300 million senior notes due 2018 at 'A+';

--$500 million senior notes due 2019 at 'A+';

--$475 million senior notes due 2023 at 'A+';

--$700 million senior notes due 2024 at 'A+';

--$800 million senior notes due 2025 'A+';

--$100 million senior debentures due 2029 at 'A+';

--$300 million senior notes due 2036 at 'A+';

--$475 million senior notes due 2043 at 'A+'.

ACE Capital Trust II

--$300 million capital securities due 2030 at 'A-'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Exposure Draft: Insurance Notching Criteria (Proposed Methodology Changes) (pub. 12 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865576

Insurance Rating Methodology (pub. 04 Sep 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987268

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987268

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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