Monday, February 22, 2016

Seeking Alpha: Chubb Ltd - Bigger And Better In A Soft Market

Insurance companies have a problem right now with what to do with their capital. Years of relatively benign losses and good premiums have built up their capital positions, but the options to deploy that capital are limited. Underwriting more business at soft rates is an option, but one that risks future underwriting profits. Investing in securities is an option, but rates are unimpressive, and returning cash to shareholders doesn't build the business. That leaves M&A, but even here there's a problem as insurance industry valuations haven't really been in bargain territory for most of the past year or so.

I do not believe that ACE Ltd.'s (NYSE:ACE) acquisition of Chubb, now known as Chubb Ltd. (NYSE:CB), was a case of having no better options for capital. Instead, I believe this is a merger that creates real opportunities for long-term synergy, as the companies combine ACE's strong broker-based business with Chubb's strong agency business and ACE's strong international business with Chubb's U.S. middle-market commercial and high net worth businesses.

In terms of what is likely to be achieved in cash earnings growth over the next five years, Chubb is probably not that cheap today. Over the longer term, though, I think there are meaningful high-quality opportunities to grow this business and I think fair value lies in the low to mid $120s.

Read more here:
Chubb Ltd - Bigger And Better In A Soft Market

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