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

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed the Insurer Financial Strength ratings (IFS) of The Chubb Corporation's CB (Chubb) property/casualty insurance subsidiaries, which are led by Federal Insurance Company (Federal) at 'AA' with a Stable Outlook. Fitch has also placed Chubb's 'AA-' Issuer Default Rating (IDR) and 'A+' senior debt rating on Rating Watch Negative. A full rating list is shown below.

KEY RATING DRIVERS

Fitch's rating action follows the announcement today that ACE Limited (ACE; 'AA' IFS) and CB have entered into a definitive agreement whereby ACE will purchase all outstanding shares of Chubb for $29 billion with a combination of cash, debt, and equity, or approximately a 30% premium relative to yesterday's closing stock price for CB. The close is expected to occur in the first quarter of 2016, subject to regulatory approvals and CB shareholder approvals.

Fitch's affirmation of Chubb's IFS ratings reflect a proposed combination of two large insurance organizations with strong, well capitalized operating franchises, and a history of favourable underwriting performance and profitability.

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 on Chubb's holding company IDR reflects that holding company ratings currently have narrower notching from the IFS ratings due to a history of high GAAP fixed charge coverage and a substantial holding company cash and investment position.

Following the closing, the new combined entity will have higher financial leverage, lower pro forma GAAP fixed charge coverage and liquidity than Chubb's current position. Under proposed changes in Fitch's technical notching criteria, the combined ACE-Chubb entity is likely to have a traditional three notch difference between the IFS and senior debt ratings that is standard for an organization with a high percentage of U.S. based operation and assets, or a wide geographic spread of operations and assets. Resolution of the Rating Watch will coincide with the closing of the transaction or implementation of Fitch's new notching criteria.

RATING SENSITIVITIES

Fitch notes that if the acquisition occurs CB's holding company ratings would likely be lowered by one notch to standard notching as Fitch anticipates reduced near term holding company liquidity and GAAP earnings based fixed charge coverage. Should this acquisition fail to materialize Fitch would likely affirm CB's ratings.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following IFS ratings at 'AA' with a Stable Outlook:

--Chubb Atlantic Indemnity Ltd.;

--Chubb Custom Insurance Co;

--Chubb Indemnity Insurance Co.;

--Chubb Insurance Company of Australia Ltd.;

--Chubb Insurance Company of Canada;

--Chubb Insurance Company of Europe, S.E.;

--Chubb Insurance Company of New Jersey;

--Chubb Lloyds Insurance Company of Texas;

--Chubb National Insurance Co.;

--Federal Insurance Company;

--Great Northern Insurance Co.;

--Pacific Indemnity Co.;

--Executive Risk Indemnity, Inc.;

--Executive Risk Specialty Insurance Co.;

--Texas Pacific Indemnity Company;

--Vigilant Insurance Co.

Fitch has placed the following ratings on Rating Watch Negative:

The Chubb Corporation

--IDR at 'AA-';

--5.75% senior notes due May 2018 at 'A+';

--6.6% notes due August 2018 at 'A+';

--6.8% debentures due November 2031 at 'A+';

--6.0% senior notes due 2037 at 'A+';

--6.5% senior notes due May 2038 at 'A+';

--6.375% junior subordinated debentures due 2067 at 'A-';

--Short-term IDR at 'F1+';

--Commercial paper at 'F1+'.

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=987280

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987280

Endorsement Policy

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

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