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The New, Bigger Chubb Is the Best P&C Insurance Buy

The combination of two moaty franchises will create a large-cap outperformer.

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 ACE (ACE) is acquiring  Chubb (CB) in a deal valued at about $28 billion. The consideration will be roughly 50/50 stock and cash and is expected to close in the first quarter of 2016. While ACE is the acquirer, the combined entity will assume the Chubb name, as management believes the Chubb brand is more established. In our view, the deal looks fairly valued. While it was made at a significant premium to Old Chubb's stand-alone value, New Chubb expects to realize $650 million in annual expense synergies by 2018. Assuming the company can achieve all of these synergies, the deal actually looks slightly value creative.

However, we are a little skeptical that the expected level of synergies will be fully realized. We don't believe that any meaningful synergies can be obtained in New Chubb's largest expense items, loss and loss adjustment expense (claims) and policy acquisition costs. Claims tend to be a completely linear cost item, and we would not expect claims as a percentage of premiums to fall materially. While there could be some possibilities to improve claims experience through fuller databases and better analytics, both companies are already essentially best in class in this area, which would seem to leave little room for material improvement. Further, Old Chubb and ACE primarily use independent agents and brokers to source business, and policy acquisition costs primarily relate to commissions paid. As a result, these costs are primarily variable, and we don't believe there are any meaningful scale benefits in this area either. That leaves administrative expenses as the only cost item that can benefit from increased scale and be materially reduced. In this light, the expected synergies of $650 million are equal to about 20% of pro forma administrative expense; this estimate looks quite aggressive, especially considering there is not a lot of overlap in the combined domestic operations. ACE primarily serves large corporate customers domestically, while Old Chubb focuses on middle-market companies and high-net-worth individuals.

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Brett Horn does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.