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Rating Action:

Moody's affirms Chubb's ratings (senior debt at A2) following ACE's announced acquisition

02 Jul 2015

Definitive agreement to be acquired by ACE Limited for $28.3 billion.

New York, July 02, 2015 -- Moody's Investors Service has affirmed the A2 senior debt and Prime-1 commercial paper ratings of The Chubb Corporation (NYSE: CB, "Chubb") and the Aa2 insurance financial strength (IFS) ratings of its operating subsidiaries following today's announcement of a definitive agreement in which ACE Limited (NYSE: ACE) has agreed to acquire all of the outstanding shares of Chubb for approximately $28.3 billion. The outlook for Chubb's ratings remains stable.

ACE Limited will finance the transaction through a combination of newly issued common shares to Chubb shareholders of approximately $13.9 billion plus cash of $14.3 billion, which will be funded through the issuance of approximately $5.3 billion of new senior debt, and $9.0 billion of cash on hand between the two companies. The transaction is expected to close in Q1 2016, subject to both ACE and Chubb shareholder votes, as well as regulatory approvals in various jurisdictions in which the groups operate worldwide.

RATINGS RATIONALE

According to Alan Murray, Moody's lead analyst for Chubb, "The affirmation of Chubb's ratings and stable outlook reflect Moody's view that the business combination with ACE Limited -- including both the financing package and the anticipated pro formal organizational structure -- will, at least for the foreseeable future, leave Chubb's prominent credit strengths including its strong franchise and operating culture, business platforms, and financial controls substantially intact.

Expanding on its rationale, Moody's noted that Chubb and ACE have pursued rather different corporate and capital deployment strategies over time, with ACE utilizing its internally generated capital significantly for acquisitions in order to expand its worldwide operating platform, while Chubb has in recent years deployed a high proportion of its net earnings to fund share repurchases. However, the rating agency views the two corporate cultures as similar in some respects, particularly with regard to operational discipline in the core insurance franchises. Both organizations are focused on underwriting and risk management controls, a strategic focus on business lines and segments in which each has sustainable competitive advantages, and an emphasis on strong financial fundamentals, including solid asset quality, strong reserving practices, sound risk-adjusted capitalization of underwriting operations, and relatively moderate use of financial leverage.

Furthermore, while execution risk is high in such a large transaction, Moody's expects that over the intermediate term at least, Chubb's operating platform will remain the hub for the combined companies' US high net worth personal lines, middle-market special commercial, and middle-market management liability insurance operations, largely preserving and expanding its existing core franchises. Moody's also expects that the Federal Insurance Company intercompany pool will remain fundamentally intact post-acquisition, continuing to support strong capitalization and ample coverage metrics at the holding company level.

Conversely, the rating agency noted that the combined enterprise's financial profile would undergo a moderate increase in strain as a result of the significant debt and internal cash used to fund the acquisition resulting in an increase in adjusted financial leverage (e.g. to the 25%-30% range). Operational leverage would also increase as a result of significant dividends to be paid out between both companies as part of the cash component of the financing. Moody's further noted that the significant goodwill generated by the transaction will result in higher debt to tangible capital. Partly tempering concerns regarding financial risk is the significant equity component of the acquisition financing, and Moody's expectation for the combined companies' laddered debt maturity profile and interim suspension of share repurchases, which should increase cash balances and support deleveraging of the combined operations.

Chubb P&C group's Aa2 IFS ratings reflect the company's strong brand in its chosen lines of business, its demonstrated commitment to underwriting discipline, its strong customer service capabilities, and a better than average track record of underwriting performance. The group maintains strong risk-adjusted capitalization, conservative reserves and a high quality investment portfolios, with moderate financial leverage and a robust liquidity profile. These strengths are tempered somewhat by the insurer's above-average underwriting exposures to catastrophe losses and to potentially volatile claim and litigation trends in its professional liability and other long-tail casualty businesses.

The spread between Chubb's A2 senior debt rating and the Aa2 IFS ratings of its subsidiaries is three notches, which is consistent with Moody's typical notching practices for US insurance holding company structures.

Given the current transaction agreement, an upgrade of Chubb's ratings is considered unlikely. Assuming completion of the transaction according to the announced terms, Moody's focus will be on the integration process and on the substantial preservation of Chubb's existing operating platform, financial and operational disciplines, and risk tolerance levels. Factors that could lead to a downgrade include: loss of key management during transition and integration process; sustained adjusted financial leverage in excess of 25%; sustained earnings and cash-flow coverage (exclusive of cash and liquid investments at the holding company) below 8x and 5x, respectively; a decline in shareholders' equity capitalization by more than 5% as a result of operating or (realized) investment losses; consistent adverse reserve development in excess of 1% of reserves annually, and/or gross underwriting leverage at 4x or greater, or weakening of risk-adjusted capital measures to A level or below.

The following ratings have been affirmed with a stable outlook:

The Chubb Corporation - senior unsecured at A2, junior subordinated debt at A3(hyb), commercial paper at P-1;

Members of the Federal Insurance Company intercompany pool:

Federal Insurance Company - insurance financial strength rating at Aa2;

Great Northern Insurance Company - insurance financial strength rating at Aa2;

Pacific Indemnity Company - insurance financial strength rating at Aa2;

Vigilant Insurance Company - insurance financial strength rating at Aa2;

Chubb Insurance Company of New Jersey - insurance financial strength rating at Aa2;

Chubb Lloyds Insurance Company of Texas - insurance financial strength rating at Aa2;

Chubb Custom Insurance Company - insurance financial strength rating at Aa2;

Chubb Indemnity Insurance Company - insurance financial strength rating at Aa2;

Chubb National Insurance Company - insurance financial strength rating at Aa2;

Texas Pacific Indemnity Company - insurance financial strength rating at Aa2;

Executive Risk Indemnity, Inc. - insurance financial strength rating at Aa2;

Executive Risk Specialty Insurance Company - insurance financial strength rating at Aa2;

Chubb Atlantic Indemnity, Ltd. - insurance financial strength rating at Aa2.

Moody's will comment on the ratings and outlooks for Chubb's subsidiaries in the Latin America region (including in Brazil, Mexico, Colombia, Argentina and Chile) in a separate press release.

The principal methodology used in these ratings was Global Property and Casualty Insurers published in August 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The Chubb Corporation (NYSE: CB), based in Warren, New Jersey, USA, provides property and casualty insurance for personal and commercial customers worldwide through independent agents and brokers. For 2014, Chubb reported gross written premiums of $13.6 billion and net income of $2.1 billion. For the first quarter of 2015, Chubb reported net income of $375 million. Shareholders' equity as of March 31, 2015 was $16.2 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alan Murray
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Riegel
MD - Insurance
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Chubb's ratings (senior debt at A2) following ACE's announced acquisition
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