FROM THE ARCHIVES: A VINTAGE CARRIER MANAGEMENT ARTICLE FROM 2015

A $28.3 billion deal to combine ACE Limited and Chubb Corp. came together in a matter of weeks, according to the leader of ACE, who also described a broader strategy to patiently build market-leading positions in diverse property/casualty businesses.

“We are first and foremost builders. Insurance is a long-term business. We are patient,” said ACE Chair and Chief Executive Officer Evan Greenberg, providing the backdrop of a deal that came together quickly but will nonetheless produce enduring benefits of diversification and scale, minimizing exposure to the commercial P/C insurance cycle.

The $46 billion global organization (in terms of shareholders equity) to be known as Chubb will now rank second among U.S. commercial lines insurers and as the U.S. leader in high-net-worth personal lines coverages. It will also be the No. 1 global player in professional lines, Greenberg said as he discussed a series of presentation slides during a conference call yesterday. The slides also indicated that the combined entity represents more than $31 billion in net written premiums for all product lines combined globally based on 2014 year-end figures.

“At ACE, we have a clear long-term strategy that we have patiently pursued both organically and through acquisitions,” Greenberg said during the conference call. “We have built with determination a presence and capability to produce sustained long-term growth and peer-leading shareholder returns. Consummating this transaction will certainly accelerate our growth and earnings power,” he said.

Greenberg attributed the speed of executing a definitive agreement to the fact that the combination simply “makes sense” to the parties involved. “These things happen when the moment is right for both,” he said, noting that ACE approached Chubb with a deal proposal just a few weeks ago. “We put the deal together rapidly but thoughtfully because it made so much sense to both sides for all our constituents.”

“This is a growth story,” he said, highlighting the strategic rewards of putting together businesses with similar underwriting cultures working in complementary segments of similar product lines as the primary deal driver. “The combined company will be so well balanced, with a greater presence and capabilities in product areas that have less exposure to the commercial P/C cycle.”

In addition, ACE and Chubb expect to realize $650 million in annual cost savings three years down the road as redundancies in functional areas and overhead expenses are eliminated from the combined entity, Greenberg said, listing a secondary financial benefit.

He went on to cite Chubb’s leading position in U.S. high-net-worth personal lines and ACE’s strengths internationally in commercial, professional, and accident and health businesses.

Greenberg also revealed opportunities for both companies to build capabilities in the small- and micro-business insurance segments in the U.S. and around the world—the only areas for which the ACE CEO acknowledged that neither company had made the strides it wanted to.

“This is a combination occurring out of strength,” he said in his initial remarks after referring to the deal announcement as a “historic moment of the joining together of two of the great companies in our industry.”

John Finnegan, chair, CEO and president of Chubb, said: “We have complementary capabilities, assets and geographic footprints. Combined with a larger, stronger balance sheet, we’ll be even better positioned to compete in a market environment where size, global reach and differentiated capabilities are increasingly keys to long-term success.”

Realism and Balance

Still, analysts asked, “Why now?” and queried Greenberg to describe exactly how revenue growth would happen and about whether targeted shareholder returns—which show the deal being immediately accretive to earnings per share and being accretive on a double-digit basis within three years—are achievable.

“I am a realist. I hardly make plans based on what I wish things would be. We face reality,” Greenberg said in response to the last question.

“We all know where the marketplace is today. We understand the amount of surplus capital that is sloshing around. We understand low-to-moderate economic growth in the world, the kind of interest rate environment we’re in, [and] we understand what drive cycles.

“I can guarantee you…we looked out [over] a prolonged period—one, two, three, four, five years. You don’t do things like this” without making long-term projections based on realistic assumptions. “It’s not a bolt-on where you’re looking out over a year or two,” he said.

Responding to an analyst who asked whether expense savings might allow Chubb to price business more cheaply, Greenberg dismissed the idea as a “fool’s game,” stressing the underwriting discipline of both companies. Instead, Greenberg envisions being able to combine the expertise of two experienced underwriting teams with the combined data of both organizations. “If we manage this right, it’s going to give us so much more insight into risk and into dissecting risk into more granular cohorts,” he said.

“Understand that the first compelling [driver] of this transaction is not the cost efficiencies. It’s the growth opportunities that we see,” Greenberg said, answering a specific question about where the $650 million in cost savings will come from. “At the same time, we see a great opportunity to improve our competitive profile while…preserving and coveting the cultures and the franchise strengths that make each company great,” he said.

“Everything is two by two, both domestically and internationally,” he said, referring to cost duplication at the two companies. “The simple fact is there is tremendous redundancy between the two [organizations] across functional areas, across corporate overhead areas and within statutory structures. So we’re going to create an elegant organization over time,” he said.

Asked specifically about how the management structures of the organizations might change, Greenberg noted that the structures of Chubb and ACE are currently different but sensible for each company on its own. “While we’re making plans for integration, it’s premature to discuss exactly how the organization will run. But I can tell you that the organization’s structure will follow common-sense strengths of each company,” he said.

At the helm, Greenberg will lead the combined company as chair and CEO. Finnegan, who is set to retire at the end of 2016, has agreed to serve as executive vice chair for external affairs in North America.

A Different World; More Deals Ahead

Asked by an analyst during the conference call if there was something about the industry today that makes this a more compelling transaction than it would have been five or 10 years ago, Greenberg replied, “The world is more globalized than it was a decade ago. That is simply a trend that is going to continue,” also referring to “technology and what it does to allow data and people and knowledge to move around the world so rapidly.”

He also referred to the value of brands in a world that increasingly moves online.

“Those are just a few examples of how we’re not in the same world today that we were a decade ago. And the playbook you use today is not the one you would have used precisely then.

“We’re in a world of low growth. We’re in a world of low inflation. We’re in a world where economic realities of countries are connected to each other. I think that’s a world that we’re going to be in for quite some time. That’s a reality that we need to face. All of that is part of the backdrop in my own thinking when I think about the compelling strategic nature of this transaction.”

While agreeing with Greenberg that there are more reasons today for companies to contemplate a merger of this magnitude, Finnegan said Chubb’s acceptance of the deal really wasn’t driven by timing in particular. “We weren’t out shopping it. This was a proposal that came to us, and we thought it was a very good one. It was driven more by the nature of the proposal, the nature of the company that we’re merging with, the economics of the deal and the strategy going forward,” he said.

Separately, Clifford Gallant, a research analyst for Normura, suggested that the deal to bring together ACE and Chubb—and other recent mergers and acquisitions—are changing the landscape for P/C insurers in another way. “M&A fever is upon the industry, and size is critical,” he wrote. “Major companies need to rethink their global ambitions and consider actions perhaps not previously considered. Small deals are likely irrelevant.”

James Auden, head of North American P/C Insurance ratings at Fitch Ratings, agrees that there are likely more deals on the horizon but thinks that all transaction sizes are possible. “Companies have a lot of capital and access to financing,” he said. “There seem to be more folks inclined to participate in deals, so there will probably be more forthcoming.”

He noted, however, that “there are fewer premier properties out there to pair up with one another given recent activities,” also referring to Tokio Marine Holdings’ recent announcement that it intends to acquire HCC Insurance Holdings for $7.5 billion.

“I think we’ll see various sizes,” he said. “When a company with a billion market cap finds somebody equivalent to their size, that’s a big deal for them. One man’s small deal is another’s big deal.”

“ACE-Chubb is a whole different magnitude of acquisition, with two underwriting powerhouses getting together,” he said. “It’s pretty unusual what that creates,” he noted, highlighting the scale of the two operations and their track records of good underwriting performance and overall profits.

These are both strong companies, he said. “The deal motivation wasn’t due to any strain at either organization.”

“Both were pretty diversified companies, but when you put the pieces together, there’s a little more market presence in a number of areas. And they were both successful across their portfolios. If they can continue to generate underwriting results similar to what the two have done independently on a bigger combined scale, that’s pretty impressive,” he said.

“It’s hard to do the big deals—to find two parties that are really interested in coming together,” he added. “There’s still plenty of risk of integration in going forward with a big deal like that, executing and reaping all the value from a transaction.

“There’s a lot of work ahead at ACE Chubb.”

Auden also noted that Chubb and HCC are strong underwriters that commanded high multiples (premiums to their market prices and book values). “I don’t think all companies would garner that sort of premium. These are top performers,” Auden said. (The Chubb deal value was a 30 percent premium to Chubb’s June 30, 2015 closing price, and the HCC value represented a 35.8 percent premium to the company’s average share price over the month prior to the deal announcement.)

Gallant, in his research note, suggested that the ACE-Chubb deal puts added pressure on reinsurers, which are already motivated to consider acquisitions. “ACE has already reduced use of reinsurance, [and] the new company’s size and diversity will make it less dependent on reinsurance,” he said, also noting ABR Reinsurance, a reinsurance venture being formed by BlackRock and ACE, has a significant pool of potential premium, with cessions now possible from ACE and Chubb.