A.M. Best Co. has lowered the senior debt ratings of The Chubb Corporation, Chubb Capital Corporation and Chubb Executive Risk Inc. to “aa-” from “aa”.
The debt issued by Chubb Capital and Chubb Executive Risk is guaranteed by The Chubb Corporation. The commercial paper rating of AMB1+ of Chubb Capital Corporation has been affirmed. The financial strength ratings of A++ (Superior) of Chubb’s property/casualty subsidiaries were affirmed on Oct. 16, and remain unaffected. The outlooks for the ratings remain stable.
A.M. Best has assigned an indicative “aa-” senior debt rating to the $525 million of equity units ($600 million if the over-allotment is exercised) to be issued by Chubb under its $1 billion shelf registration. Proceeds from the equity units will be used for general corporate purposes, including capital contributions to the property/casualty subsidiaries.
Historically, Chubb has conservatively managed its capital structure and financial leverage. Although higher than historical levels, Chubb’s financial leverage as measured by debt and capital securities to total capital is still a moderate 16 percent at the end of the third quarter 2002.
The addition of the mandatory convertible securities – given its pre-funded feature – does not materially change financial leverage. More importantly, the level of the holding company’s cash requirements has increased commensurately over the years, elevating Chubb’s cash needs – including interest expense and shareholder dividends – to more than $370 million for 2003. The ability to accumulate capital at the subsidiary level remains somewhat constrained by the dividends to be up-streamed to meet holding company obligations and concerns regarding future capital formation. The latter concern is further heightened by the potential for continued earnings variability as it relates to Chubb’s sizable loss exposure to gas forward purchase surety contracts (similar to those it issued on behalf of Enron Corp.) and the future emergence of losses from classes of business such as directors and officers liability.
Finally, there remains uncertainty relating to Chubb’s reinsurance coverage limits and actual reinsurance recoverables associated with the events of Sept. 11.
These rating changes consider the potential variability of earnings and the conflict between holding company liquidity and surplus accumulation at the subsidiary level. Nevertheless, Chubb’s financial strength ratings assume that capitalization at the property/casualty subsidiaries will be maintained at a level consistent with the group’s Superior rating.
While the property/casualty subsidiaries continue to provide sufficient dividend capability, Chubb’s debt ratings previously benefited from the exceptional liquidity at Chubb Corporation and its four subsidiary holding companies.
A.M. Best believes the majority of existing assets, along with the additional $525 million raised through the equity units, will be utilized for capital contributions to Chubb’s operating subsidiaries. Consequently, a lower holding company liquidity level was a major factor in the rating actions.
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