DBRS Morningstar Assigns Financial Strength Ratings of AA to Federal Insurance Company and ACE Property and Casualty Insurance Company; All Trends are Stable

DBRS Limited (DBRS Morningstar) assigned Financial Strength Ratings of AA to Federal Insurance Company and ACE Property and Casualty Insurance Company, which are subsidiaries of Chubb Limited (Chubb). The trends are Stable.

KEY RATING CONSIDERATIONS
The ratings and Stable trends reflect the financial strength of Federal Insurance Company and ACE Property and Casualty Insurance Company as subsidiaries of Chubb, which is the largest publicly traded property and casualty (P&C) insurer in the world. The broadly diversified product mix of Chubb’s combined operating subsidiaries and leading market positions help support a strong overall earnings ability. While Chubb’s combined operating subsidiaries are the largest provider of cyber insurance in the U.S., this market position exposes it to potentially large and systemic risks in addition to more traditional weather-related catastrophes. Nonetheless, Chubb’s operating subsidiaries have historically managed their exposure to catastrophic losses well, including from cyber risk, through a combination of policy terms, conditions, and limits as well as through reinsurance protection in the context of relatively conservative risk management and corporate governance policies, which provide additional support to the ratings.

RATING DRIVERS
DBRS Morningstar would upgrade the ratings of Federal Insurance Company and ACE Property and Casualty Insurance Company if Chubb’s combined operating subsidiaries showed a material and sustained improvement in their risk profile and overall profitability, while maintaining strong regulatory capital ratios. Conversely, DBRS Morningstar would downgrade the ratings if there is a sustained deterioration in overall profitability, capitalization and market positioning of Chubb’s combined operating subsidiaries.

RATING RATIONALE
DBRS Morningstar views Chubb’s leading global market position and its long-standing presence in P&C insurance industry as a key contributor to the franchise strength of Federal Insurance Company and ACE Property and Casualty Insurance Company. Additionally, diversified product offerings and robust distribution channels position the companies well for future growth.

Federal Insurance Company and ACE Property and Casualty Insurance Company are exposed to catastrophic risk through their underwriting of traditional and specialty commercial insurance products. The companies manage their exposures to different types of catastrophic losses, including from cyber risk, through an integrated enterprise risk management framework employing the three lines of defense model. Cyber risk is mitigated with policy limits, terms and conditions as well as through reinsurance protection placed with highly rated counterparties. Chubb’s combined operating subsidiaries have a strong record of underwriting profitability relative to peers over a long period of time. DBRS Morningstar expects that prevalent global hard market conditions in commercial insurance will continue to support strong underwriting revenue. This trend has continued into 2022 with record underwriting profits and a combined ratio of 84% in Q1 2022.

Chubb has a very large high-quality fixed income portfolio consisting of 82% investment grade securities, and this composition has been relatively stable over time. Equities represent a small proportion of the overall investment portfolio. Overall investment income contribution to net income has been very steady in the $3.0 billion to $3.5 billion range annually, over the past five years. However, higher interest rates will lead to mark -to- market unrealized losses on the investment portfolio which is dominated by fixed income assets. In Q1 2022, the total portfolio investment loss was $3.6 billion. Over the longer term, as higher yielding assets replace existing bonds, investment income is expected to increase.

As part of the largest P&C insurer in the world, Federal Insurance Company and ACE Property and Casualty Insurance Company have good access to capital markets and capital flexibility. The very large and liquid investment portfolio and access to other forms of on- demand credit facilities at the holding company level provide ample liquidity. Financial leverage is consistent with the assigned ratings, while regulatory capital levels are well above regulatory minimums.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Federal Insurance Company and ACE Property and Casualty Insurance Company are as follows: Franchise Strength – Very Strong; Risk Profile – Strong/Good; Earnings Ability – Strong; Liquidity – Strong/Good; Capitalization – Strong.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Global Methodology for Rating Insurance Companies and Insurance Organizations (https://www.dbrsmorningstar.com/research/381667; July 16, 2021). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (https://www.dbrsmorningstar.com/research/373262; February 3, 2021).

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577