Following the revision of Brazil's global rating rating outlook to stable from positive by Moody’s the rating agency took rating action on the Brazilian subsidiary of Chubb Corp.
(CB - Free Report
The insurance financial strength (IFS) rating of Chubb do Brasil, based in São Paulo, was affirmed at Baa1. The rating outlook on the company however, was changed to stable from positive.
Moody’s rating action on Chubb do Brasil ratings is moving in sync with the country ratings.
Earlier Chubb do Brasil carried a stable outlook when the country’s sovereign rating of Baa2 also carried a positive outlook. A rating upgrade was in the cards for the company by Moody’s provided the country’s sovereign rating was pulled up and also provided the company performed at sustainable level of profitable operations.
Now since Brazil’s sovereign rating has been reaffirmed at the current levels and the outlook has been downgraded, the rating agency views any positive rating action on Chubb do Brasil in the near future as unlikely.
The rating affirmation takes into account consistent operating profitability, a diversified product portfolio, maintenance of superior risk-adjusted capital and a lower operating leverage for Chubb do Brasil. Consistent capital support from the parent company which also carries strong debt ratings is another positive. The company has also been able to strengthen its capital position with the help of reinsurance agreement with Federal Insurance Company, another company of Chubb.
However, Chubb do Brasil’s modest penetration in the insurance market and exposure to Brazilian sovereign bonds offsets the above positives to some extent. Also the company’s operations results for the first half of 2013 have weakened compared to the same period in the previous year.
Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence on the stock as well as maintaining credit worthiness in the market. Rating downgrades, therefore, adversely affect the business, apart from increasing the costs of future debt issuances. We believe that strong ratings will help the company retain investor confidence and help it write more businesses going forward, thereby boosting results.
Going forward rating upgradation can be made if Brazil’s rating is upgraded, company’s profitability improves signified by return on capital increasing above 12%, combined ratio stays below 95% and there is continued capital support from the parent.
A rating downgrade is likely if the return on capital dwindles below 10%, parent company of the country’s ratings suffers a downgrade and underwriting ratio increases to above 5 times of shareholder’s equity.
Chubb currently retains a Zacks Rank # 2 (Buy). Other insurers Alleghany Corp.
(Y - Free Report
) , Selective Insurance Group Inc.
(SIGI - Free Report
) and Montpelier Re Holdings Ltd.
all with Zacks rank #1 (Strong Buy) are worth investing in.