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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