Skip to Content
Stock Strategist

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

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

Mentioned: , , , ,

 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.

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

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.