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U.S. property and casualty insurer, The Chubb Corp. (CB - Analyst Report) underwent a rating action from Moody's Investors Service, a unit of Moody's Corporation (MCO - Analyst Report). The rating agency reiterated the “A2” senior debt and Prime-1 commercial paper ratings of the parent company and affirmed the “Aa2” insurance financial strength ratings of its operating subsidiaries.
 
The rating agency acknowledges Chubb's superior and trusted brand name in its niche market, high-end personal lines, management liability and specialty commercial lines. The company’s superior performance is reflected in its combined ratio which has been better than its peers. The company’s also gets immense satisfaction from its customers as far as providing service is concerned. 
 
Apart from maintaining operating discipline, Chubb also boasts a strong balance sheet as reflected by its strong risk adjusted capitalization, adequate reserves, modest financial leverage, conservative investment portfolio and sufficient liquidity with $1.98 billion of cash and high-quality securities as of the end of second-quarter 2014. This strong liquidity position enables the parent to extend capital cushion to its subsidiaries. 
 
Offsetting these positives to some extent is Chubb's exposure to catastrophes. Also, the rating agency is concerned about claims that can arise in its professional liability and other long-tail casualty businesses, draining its earnings.
 
Moody’s also pointed to a 23% year-over-year decline in consolidated operating income to $792 million for the first six months of 2014. The rating agency, however, is of the opinion that since the decline was primarily caused by higher catastrophes, non-catastrophe weather-related losses and large fire losses, Chubb can make up for the decline in the second half of the year if catastrophe activity is at a normal level. 
 
The ratings carry a stable outlook which indicates no change over the near term. Nevertheless, a rating upgrade may occur if Chubb's financial leverage declines to less than 15%; reduction in claims; increase in earnings coverage of more than 10x and cash flow coverage of more than 6x; and maintenance of a conservative reserve profile.
 
A rating downgrade is likely if, shareholders’ equity declines by more than 5%; consistent unfavourable reserve development, financial leverage increases more than 25%, and underwriting leverage is more than equal to 4%.
 
Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining credit worthiness in the market. Rating downgrades, therefore, adversely affect the business, apart from increasing the cost of future debt issuances. We believe that strong ratings will help Chubb to retain investor confidence and help it to write more businesses going forward, thereby boosting results. 
 
Chubb currently carries a Zacks Rank # 3 (Hold). Other insurers worth considering include Endurance Specialty Holdings Ltd. (ENH - Snapshot Report) and Global Indemnity plc (GBLI). Both these stocks sport a Zacks Rank #1 (Strong Buy).

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