July 3, 2015 by Canadian Underwriter
Moody’s Investors Service has affirmed the A3 senior debt rating of ACE INA Holdings Inc. with a stable outlook following the announcement that ACE has agreed to acquire all outstanding shares of The Chubb Corporation for approximately US$28.3 billion.
ACE INA’s debt is unconditionally guaranteed by the group’s parent company, ACE Limited, notes a statement Thursday from Moody’s.
“ACE Limited will finance the transaction through a combination of newly issued common shares to Chubb shareholders of approximately US$13.9 billion plus cash of US$14.3 billion, which will be funded through the issuance of approximately US$5.3 billion of new senior debt, and US$9.0 billion of cash on hand between the two companies,” Moody’s reports.
“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,” Alan Murray, Moody’s lead analyst for ACE and senior vice president of the company’s Financial Institutions Group, reports in the statement.
“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,” Murray continues.
It is expected, however, that in the near term, there will be integration challenges and challenges presented “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.”
Moody’s reports that ACE’s acquisition of Chubb Corporation’s outstanding shares would transform the former’s United States operational platform. The move almost doubling 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 and health, and crop agricultural insurance,” the statement notes.
Despite those positives, Moody’s points out “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.”
That said, “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,” the statement adds.
The rating agency has also noted actions on several of ACE Group’s operating subsidiaries. This includes a shift to a positive outlook from stable for ACE USA’s A1 insurance financial strength ratings (which considers the group’s broadened business platform and spread of risk, and significant potential for further franchise enhancement through affiliation with Chubb).
It also includes a review for possible downgrade of the Aa3 IFS ratings on ACE’s Bermuda-based operations (ACE Tempest Reinsurance Limited, and ACE Bermuda Insurance Limited) and title reinsurance subsidiary.
ACE’s acquisition of Chubb Corporation shares is expected to close in the first quarter of 2016, subject to separate votes by ACE and Chubb shareholders, and regulatory approvals in various jurisdictions in which the groups operate worldwide.
Zurich-based ACE Limited reported gross premiums written of US$23.4 billion and net income of US$2.85 billion for full year 2014, notes the Moody’s statement. For the first quarter of 2015, ACE reported net income of US$2.85 billion, while shareholders’ equity as of March 31, 2015 was US$29.7 billion.
Moody’s reported that it would address ratings for Chubb Corporation separately. On Thursday, though, A.M. Best announced it was putting “under review with negative implications the financial strength rating (FSR) of A++ (Superior) and the issuer credit ratings (ICR) of ‘aaa’ of the property/casualty subsidiaries of The Chubb Corporation,” notes a statement from the rating agency. This includes Chubb Insurance Company of Canada.
A.M. Best’s rating actions follow the recent announcement about ACE’s acquisition of Chubb Corporation. The statement notes that “each organization brings a solid reputation and strong history of favourable operating results to the merger. In addition, their business profiles are relatively complementary in terms of products offerings and customer focus, and the merger should allow each to broaden customer solutions by adapting the others’ products to their specific operations.”
Even so, ACE intends to finance the cash portion of the transaction through a combination of US$9 billion of ACE and Chubb Corp cash plus US$5.3 billion of senior notes. As a result, A.M. Best notes that it expects risk-adjusted capitalization will be reduced and financial leverage increased for the merged enterprise. As well, there is significant execution risk associated with the transaction itself and with the operational consolidation that will be required to realize the efficiencies expected from the transaction, the statement adds.
“The negative outlook reflects the potential effect of these factors on the ratings following the close of the transaction,” A.M. Best states.