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Rating Action:

Moody's affirms debt ratings of ACE Group (ACE INA Holdings backed senior at A3) with stable outlook

02 Jul 2015

Definitive agreement to acquire The Chubb Corporation for $28.3 billion.

New York, July 02, 2015 -- Moody's Investors Service has affirmed the A3 senior debt rating of ACE INA Holdings Inc. (ACE INA) -- whose debt is unconditionally guaranteed by the group's parent company ACE Limited (NYSE: ACE) -- with a stable outlook following today's announcement that ACE has agreed to acquire all of the outstanding shares of The Chubb Corporation (NYSE: CB, "Chubb") for approximately $28.3 billion. Moody's also took action on various subsidiaries of the group, as noted below.

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 ACE, "The affirmation of ACE INA's debt ratings reflects ACE's franchise strength with a diversified international spread of risk, strong profitability, as well as its operating and financial leverage profile, pro forma for the transaction. We view the addition of Chubb's robust US-based franchise as positioning the combined group with a market-leading platform across commercial, specialty and high-end personal lines operations, with exceptional product depth and breadth." Near-term, however, Moody's sees these benefits as counterbalanced by integration challenges in such large organizations, and by the somewhat leveraged nature of the acquisition, given the additional debt financing and use of cash to fund approximately half of the aggregate purchase price. Pro-forma adjusted leverage measures are expected to be higher for a period of time than has been characteristic of either ACE or Chubb in recent years.

Expanding on its rating rationale, Moody's noted that the acquisition would transform ACE's US operational platform -- nearly doubling its premium volume -- by combining Chubb's market-leading high-end personal lines, management liability, and specialty commercial operations with ACE's significant franchises in large-corporate risk management, excess and surplus lines, accident & health, and crop agricultural insurance. 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 estimates that transaction is expected to generate significant goodwill, which will similarly 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.

In addition to affirming ACE's debt ratings, Moody's also noted actions on several of the group's operating subsidiaries, including a shift to a positive outlook from stable for ACE USA's A1 insurance financial strength ratings and a review for possible downgrade of the Aa3 IFS ratings on ACE's lead Bermuda-based subsidiaries and title reinsurance subsidiary.

The affirmation of the A1 IFS ratings of ACE USA's principal operating subsidiaries reflects the group's established US presence in commercial and specialty insurance including excess and surplus lines, as well as its leadership in the agricultural insurance sector through its Rain and Hail operations, and its solid financial profile, consistent profitability and improved capitalization. The positive outlook considers the group's broadened business platform and spread of risk, and significant potential for further franchise enhancement through affiliation with Chubb.

The review for possible downgrade of the Aa3 IFS ratings on ACE's Bermuda-based operations (ACE Tempest Reinsurance Limited, and ACE Bermuda Insurance Limited) contemplate the potential for these entities to contribute part of the acquisition funding, and the review for possible downgrade of the Aa3 IFS rating of ACE Capital Title Reinsurance Company reflects its ownership by ACE Bermuda Insurance Limited. Although ACE has liquid resources in many subsidiaries and jurisdictions, the group's Bermuda-based capital has been an important source of parent company liquidity for acquisitions. ACE Bermuda's IFS rating also reflects its leadership position in large accounts professional liability, excess liability and political risk insurance as well as strong operating returns on average, strengths that are balanced against business line characteristics that pose unique challenges for pricing and reserving, specifically long claim settlement periods and low frequency/high severity nature of losses. ACE Tempest Re's IFS rating also reflects its reputation as a strong underwriting company in the reinsurance market and consistent track record of being amongst the most profitable reinsurers.

Assuming completion of the transaction according to the announced terms, Moody's focus will be on the integration process and on the combined financial and operational disciplines, as well as risk tolerance levels. Apart from the transaction, factors that could lead to an upgrade include: meaningful improvement in the credit profile of one or more of the group's principal subsidiaries; sustained adjusted financial leverage less than 20%, and/or earnings coverage of interest and preferred dividends consistently above 10x; and sustained gross underwriting leverage less than 4x. Factors that could lead to a rating downgrade include: weakness in earnings (return on capital over the cycle below 5%); a decline in shareholders' equity capitalization by more than 5% as a result of operating or investment losses over the course of a year; adverse reserve development of core reserves in excess of 5% of carried and/or adjusted financial leverage rising above 30% and/or earnings coverage of interest and preferred dividends consistently below 6x.

The following ratings have been affirmed with stable outlooks:

ACE INA Holdings Inc. -- backed senior unsecured debt to at A3, backed senior unsecured shelf at (P)A3; subordinated shelf at (P)Baa1; (backed by ACE Limited);

ACE Capital Trust II - backed preferred securities at Baa1 (hyb); (backed by ACE Limited);

ACE Capital Trust III and IV - backed preferred securities shelf at (P)Baa1; (backed by ACE Limited).

The following ratings have been affirmed with outlooks revised to positive, from stable:

Members of the ACE USA Group:

ACE American Insurance Company - insurance financial strength at A1;

ACE Fire Underwriters Insurance Company - insurance financial strength at A1;

ACE Property & Casualty Insurance Company - insurance financial strength at A1;

Indemnity Insurance Co. North America - insurance financial strength at A1;

Pacific Employers Insurance Co. - insurance financial strength at A1;

Atlantic Employers Insurance Co. - insurance financial strength at A1;

ACE Insurance Co. Midwest - insurance financial strength at A1;

Bankers Standard Insurance Co. - insurance financial strength at A1;

Bankers Standard Fire & Marine Co. - insurance financial strength at A1;

Illinois Union Insurance Company - insurance financial strength at A1;

Insurance Co of North America - insurance financial strength at A1;

Westchester Fire Insurance Co. - insurance financial strength at A1;

Westchester Surplus Lines Insurance Company - insurance financial strength at A1.

The following ratings have been placed on review for possible downgrade:

ACE Bermuda Insurance Ltd - insurance financial strength at Aa3;

ACE Tempest Reinsurance Ltd - insurance financial strength at Aa3;

ACE Capital Title Reinsurance Company - insurance financial strength at Aa3.

The following ratings have been withdrawn:

Century Indemnity Company -- insurance financial strength at Ba3;

Combined Insurance Company of America -- insurance financial strength at A2.

Moody's has withdrawn the ratings for its own business reasons. Please refer to the Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

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.

For the full year 2014, ACE Limited, based in Zurich, Switzerland, reported gross premiums written of $23.4 billion and net income of $2.85 billion. For the first quarter of 2015, ACE reported net income of $2.85 billion. Shareholders' equity as of March 31, 2015 was $29.7 billion.

The methodologies used in these ratings were Global Property and Casualty Insurers published in August 2014, and Global Reinsurers published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine this credit rating.

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 debt ratings of ACE Group (ACE INA Holdings backed senior at A3) with stable outlook
No Related Data.
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