Best Revises Outlook on Chubb and Subs ICR Ratings to Positive; Affirms FSR

March 21, 2014

A.M. Best has revised the outlook of the issuer credit ratings (ICR) to positive from stable and affirmed the financial strength rating (FSR) of ‘A++’ (Superior) and the ICRs of “aa+”of the property/casualty subsidiaries of The Chubb Corporation, also known as the Chubb Group of Insurance Companies.

The outlook for the FSR is stable. Best has also affirmed the ICR of “aa-“, all long-term debt and indicative ratings and the AMB-1+ on the commercial paper of Chubb Corp, and has revised the outlook for the ICR and all debt ratings to positive from stable, with the exception of the commercial paper, which does not have an outlook.

Best has also affirmed the FSR of ‘A++’ (Superior) and ICR of “aa+” of Bermuda-based Chubb Atlantic Indemnity Ltd., both with stable outlooks.

In addition, Best has withdrawn the FSR of ‘A++’ (Superior) and ICR of “aa+” of Oregon-based Northwestern Pacific Indemnity Company, following its February 12, 2014 sale to Cottage Insurance Holdings. All of the companies are headquartered in Warren, New Jersey, except where otherwise specified.

The rating affirmations reflect the Chubb Group’s “superior risk-adjusted capitalization, excellent underwriting and overall operating performance, and the sustainable competitive advantages within its specialty and upscale personal insurance businesses, as demonstrated by its consistent outperformance of industry peers,” Best explained.

“The ratings also recognize Chubb Group’s comprehensive and proactive enterprise risk management, disciplined underwriting practices, strong franchise recognition and access to the capital markets through Chubb Corp. The group’s positive rating attributes are enhanced by its position as a leading insurer in the United States and its global presence in specialty markets.”

Best explained that Chubb Group’s balance sheet strength “is derived from its consistent generation of underwriting results, despite the recent impact of catastrophes and competitive market conditions. Additionally, the group benefits from a well-diversified book of business, which has led to excellent risk-adjusted capitalization. Chubb Group’s results also benefit from an above average total return on invested assets and strong underwriting and operating cash flows.

As partial offsetting factors Best cited the “challenging market conditions and catastrophe and other weather-related losses, which have impacted Chubb Group’s underwriting performance in three out of the last five years.

“Catastrophe losses added approximately six, nine and 10 points to the group’s combined ratios for 2010, 2011 and 2012, respectively,” Best pointed out. Management, however, “remains focused on limiting exposures through actively monitoring these risks and maintaining a prudent reinsurance program.

“In addition, the group has historically recognized adverse development of the loss reserves associated with its asbestos and environmental liabilities, although overall development of loss reserves has been favorable in the majority of the accident and calendar years.”

Best said that “given Chubb Group’s leading market position, specialty niche underwriting focus, prudent balance sheet liquidity, strong cash flows and excellent risk-adjusted capitalization,” it considers Chubb to be” favorably positioned and sufficiently capitalized to absorb these challenges and those posed by the continued competitive market.

“Chubb Atlantic’s ratings recognize its solid risk-adjusted capitalization and the implicit and explicit support provided by Chubb Corp. This financial support is evidenced by the capital contributions Chubb Corp. has made in recent years to support the operations of Chubb Atlantic and its subsidiary, Chubb do Brasil Companhia de Seguros (Brazil). Furthermore, Chubb Atlantic is the beneficiary of sizable irrevocable letters of credit issued by banks on behalf of Chubb Corp. The ratings also reflect Chubb Atlantic’s strategic importance within the Chubb Group, including its quota share reinsurance assumed from affiliates.

As a partial offsetting factor for Chubb Atlantic, Best noted the volatility in the company’s underwriting performance in prior years, largely due to adverse loss reserve development.

“Chubb Corp.’s debt-to-tangible capital ratio is maintained at a modest 18 percent as of December 31, 2013,” Best’s report said. “Despite the company’s ongoing share repurchase program, liquid assets at the holding company are expected to be maintained at a level more than sufficient to cover annual holding company expenses.”

In conclusion Best said: “Future positive rating actions may result from the group’s continued strong underwriting and operating performance. However, negative rating actions could result if operating performance or risk-adjusted capitalization falls markedly short of Best’s expectations.”

Best explained that the withdrawal of the ratings for Northwestern Pacific “reflects its sale to Cottage, which does not participate in Best’s interactive rating process. As part of the transaction, all of Northwestern Pacific’s liabilities for its activities prior to the sale (including all previously written policies) were assumed by Pacific Indemnity Company, another member of the Chubb Group.

Best summarized the company’s affected by its ratings review as follows:

The FSR of ‘A++’ (Superior) and the ICRs of “aa+” have been affirmed for the following property/casualty subsidiaries of The Chubb Corporation:

• Federal Insurance Company

• Chubb Custom Insurance Company

• Chubb Indemnity Insurance Company

• Chubb Insurance Company of Australia Limited

• Chubb Insurance Company of Europe SE

• Chubb Insurance Company of Canada

• Chubb National Insurance Company

• Executive Risk Indemnity Inc.

• Executive Risk Specialty Insurance Company

• Great Northern Insurance Company

• Pacific Indemnity Company

• Vigilant Insurance Company

• Chubb Insurance Company of New Jersey

• Chubb Lloyds Insurance Company of Texas

• Texas Pacific Indemnity Company

The following debt rating has been affirmed:

The Chubb Corporation—

– AMB-1+ on commercial paper

The following debt ratings have been affirmed:

The Chubb Corporation—

– “aa-” on $600 million 6.5 percent senior unsecured notes, due 2038

– “aa-” on $600 million 5.75 percent senior unsecured notes, due 2018

– “aa-” on $800 million 6.0 percent senior unsecured notes, due 2037

– “aa-” on $200 million 6.8 percent senior unsecured debentures, due 2031

– “aa-” on $100 million 6.6 percent senior unsecured debentures, due 2018

– “a” on $1 billion 6.375 percent junior subordinated debentures, due 2067

The following indicative ratings on securities available under the shelf registration have been affirmed:

The Chubb Corporation—

– “aa-” on senior unsecured debt

– “a+” on subordinated debt

– “a+” on preferred securities

– “a” on preferred stock

Source: A.M. Best

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