CHICAGO--(BUSINESS WIRE)--Fitch Ratings expects to assign an 'A' rating to the $5.3 billion senior unsecured notes issuance planned by ACE INA Holdings Inc., a subsidiary of ACE Limited (ACE). The new notes will be fully and unconditionally guaranteed by ACE and are therefore based on ACE's 'A+' Issuer Default Rating (IDR). A complete list of ratings follows at the end of this release.
Fitch expects that the net proceeds from this new senior debt issuance will be used for the acquisition financing of The Chubb Corporation (Chubb; 'AA' IFS), which is expected to close in 1Q2016.
Following the acquisition announcement on July 1, 2015, Fitch affirmed ACE's Insurer Financial Strength (IFS) ratings and placed the holding company and debt ratings on Watch Negative reflecting pending changes in Fitch's technical notching criteria, as well as the company's higher pro forma financial leverage and lower interest coverage post-acquisition.
On Aug. 27, 2015, Fitch resolved the Rating Watch Negative and downgraded ACE's holding company and debt ratings one notch with the implementation of Fitch's new notching criteria.
KEY RATING DRIVERS
Fitch views the planned debt issuance favorably since it eliminates near-term acquisition financing risk. Additionally, the debt will likely be issued at reasonable interest rates similar to existing debt, and the resulting overall debt maturity profile will be well laddered.
On July 1, 2015, ACE announced that the company and Chubb had entered into a definitive agreement whereby ACE will purchase all outstanding shares of Chubb for $28.3 billion with a combination of cash, debt, and equity, or approximately a 30% premium relative to the prior day closing stock price for CB.
ACE's financial leverage ratio (FLR) (total debt to capital excluding FAS 115 unrealized gains and losses) as of Sept. 30, 2015 was 18.8%, which included $1.5 billion of pre-funded debt to be repaid in 2015, 2017, and 2018. Fitch estimates the pro forma FLR at closing will increase to roughly 25% primarily as a result of the increased debt (both newly issued and assumed from Chubb), which remains consistent with Fitch's median sector credit factors for the current rating category. After the repayment of $700 million pre-funded debt in November 2015, the pro forma FLR would decrease to 24%. Financial leverage is likely to decline due to near-term debt maturities and future retained earnings growth.
ACE's operating interest coverage (excluding realized investment gains) was favorable and consistent at roughly 15x through nine months 2015 and in both 2014 and 2013. Post-acquisition, Fitch expects coverage to be lower in the high-single digits due to higher near-term debt levels and interest expense. The new combined entity is anticipated to have favorable debt servicing capacity from operating subsidiary dividend capacity, earnings, and other liquidity sources.
RATING SENSITIVITIES
Fitch expects to update rating sensitivities upon acquisition closing. Key current rating triggers that may lead to an upgrade include:
--Generating a combined ratio consistently under 85%;
--Maintained growth in stockholders' equity that corresponds with premium and asset growth;
--A reduction in financial leverage to a run-rate level of 15% or lower;
--Operating earnings-based interest and preferred dividend coverage at or above 15x;
--Movement in ACE's retention ratio (net premium written to gross premium written) to increase over time to be more in line with highly-rated peers;
--Continuing a track record of successful acquisition execution.
Key rating triggers that may lead to a downgrade include:
--A sustained material deterioration in operating performance such that the combined ratio is consistently less profitable at over 95%;
--A significant reduction in stockholders' equity that is not recovered in the near term;
--Increases in financial leverage to a sustained level of over 25%.
Any future acquisitions and the associated integration risks and company profile changes could lead to pressure on the ratings, upward or downward, depending on the nature and size of the acquisition and corresponding integration risks.
Fitch expects to assign the following ratings:
ACE INA Holdings Inc.
--Senior unsecured notes 'A(EXP)'.
Fitch currently rates ACE and its subsidiaries as follows:
ACE Limited
--Issuer Default Rating (IDR) 'A+'.
ACE INA Holdings Inc.
--IDR 'A+';
--$700 million senior notes due 2015 'A';
--$500 million senior notes due 2017 'A';
--$300 million senior notes due 2018 'A';
--$500 million senior notes due 2019 'A';
--$475 million senior notes due 2023 'A';
--$700 million senior notes due 2024 'A';
--$800 million senior notes due 2025 'A';
--$100 million senior debentures due 2029 'A';
--$300 million senior notes due 2036 'A';
--$475 million senior notes due 2043 'A'.
ACE Capital Trust II
--$300 million capital securities due 2030 'BBB+'.
ACE American Insurance Company
ACE Bermuda Insurance Limited
ACE Fire Underwriters Ins. Company
ACE INA Overseas Insurance Company Ltd.
ACE Insurance Company of the Midwest
ACE Property and Casualty Insurance Company
ACE Reinsurance (Switzerland) Limited
ACE Tempest Reinsurance Limited
Agri General Insurance Company
Atlantic Employers Insurance Company
Bankers Standard Fire & Marine Company
Bankers Standard Insurance Company
Illinois Union Insurance Company
Indemnity Insurance Company of North America
Insurance Company of North America
Pacific Employers Insurance Company
Westchester Fire Insurance Company
Westchester Surplus Lines Insurance Company
--IFS 'AA'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
Applicable Criteria
Insurance Rating Methodology (pub. 16 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=992767
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992767
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.