The Chubb Corporation’s CB subsidiaries – Chubb Group of Insurance Companies – were recently assigned financial strength rating (FSR) of A++ (Superior) and the issuer credit ratings (ICR) of “aaa” with negative review by A.M. Best.
Additionally, Chubb Corp.’s long-term debt was assigned ICR of “aa” with negative implications. A.M Best also provided the company’s indicative ratings and rated AMB-1+ on the company’s commercial paper. Moreover, another affiliate – Chubb Atlantic Indemnity Ltd. – was assigned FSR of A++ and the ICR of “aa+.”
These rating actions came after ACE Limited ACE inked a deal to buy Chubb Corp. in a 50/50 cash-stock consideration. The transaction is expected to close in the first quarter of 2016 subject to shareholders’ approval, fulfillment of customary regulatory and other customary closing conditions. To fund the cash portion of the transaction, ACE intends to utilize $9 billion of cash resources of both ACE and Chubb Corp. as well as $5.3 billion of senior notes.
The credit rating agency expects the company’s risk-adjusted capitalization to reduce along with an increase in the financial leverage of the merged enterprise as a result of the transaction. Moreover, the transaction is expected to result in operational synergies through consolidation and higher efficiencies post the merger. Both these factors have influenced the ratings and the negative outlook that have been rendered by A. M. Best.
Concurrently, Moody's Investors Service – a credit rating business of Moody's Corporation MCO – affirmed A3 senior debt rating of ACE Limited’s subsidiary, ACE INA Holdings Inc, with a stable outlook. The credit rating agency also upgraded the outlook of ACE USA's A1 insurance financial strength ratings to positive from stable. Moreover, Moody’s has placed the Aa3 IFS ratings on ACE's lead Bermuda-based subsidiaries and title reinsurance subsidiary under review for a possible downgrade.
ACE INA's debt ratings affirmation reflects ACE's solid franchise strength along with a diversified international spread of risk, strong profitability and operating and financial leverage profile. Additionally, A1 IFS ratings of ACE USA's principal operating subsidiaries reflect the company’s solid footprint in the U.S., leadership in agricultural insurance sector, strong financial profile as well as continuous profitability and improved capitalization. The positive outlook also indicates the company’s widened business platform and spread of risk, along with great potential for further franchise enhancement post the transaction with Chubb.
Chubb Corp. was also affirmed the A2 senior debt and Prime-1 commercial paper ratings by Moody’s. Also, the company’s operating subsidiaries were affirmed IFS of Aa2 by the credit rating agency. Both the ratings were affirmed a stable outlook.
These ratings show that Moody’s is optimistic about the deal between Chubb Corp. and ACE. The credit rating agency believes that the merger will bolster Chubb's prominent credit strengths including its solid franchise and operating culture, business platforms, and its financial controls will remain intact going forward.
Rating affirmations or upgrades from credit rating agencies play an important part in instilling investors’ confidence in the stock as well as in maintaining its creditworthiness in the market. Following the acquisition, the combined entity will become the leader in terms of P&C underwriting income.
The new entity is also expected to be strong with regards to growth and earnings power. Moreover, ACE expects the deal to be immediately accretive to its earnings per share and book value. ACE also expects the deal to be accretive to return on equity by the end of third year. The buyout agreement is anticipated to attract the rating agencies to keep a track of the combined company.
Currently, Chubb Corp. carries a Zacks Rank #3 (Hold). A better-ranked stock from the same sector is Endurance Specialty Holdings Ltd. ENH, which sports a Zacks Rank #1 (Strong Buy).
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