By Leslie Scism and Erik Holm
Insurer ACE Ltd. agreed to buy Chubb Corp. for $28.3 billion in
cash and stock, creating one of the biggest property-casualty
insurance companies in the world as a deal boom that is combining
companies in sectors from technology to health care sweeps into
another industry.
The deal comes as property-casualty insurers are facing pressure
from what most people view as a stroke of good luck: relatively
modest hurricane claims since 2012, the year of superstorm Sandy.
With fewer claims checks being sent to individuals and businesses,
insurers' capital bases are growing, and their stepped-up
competition with each other to put that capital to work is
depressing prices.
Moreover, an influx of new competitors in the industry is also
squeezing prices, while low interest rates are pinching insurers'
investment income, which accounts for a significant portion of
their profit.
Those factors have helped spark several multibillion-dollar
insurance tie-ups since late last year, most recently Tuesday's
announcement of an $18 billion combination of insurance broker
Willis Group Holdings PLC and consulting firm Towers Watson &
Co.
Conditions are ripe for more big deals, analysts say.
"M&A fever has seized the industry, and size has become
critical," said stock analyst Clifford Gallant of Nomura Securities
International Inc. "In insurance-industry boardrooms across the
country, directors are thinking about the next step: Do they need
to buy for consolidation, for expense reduction or to get into new
lines of business? We are in a phase where boardrooms need to think
creatively about ways to enhance value."
The ACE deal, announced by both companies Wednesday, is one of
the largest of the year and the biggest among life and
property-casualty insurers on record, according to Dealogic, with
the exception of the government bailout of American International
Group Inc. in 2008, which swelled to nearly $185 billion at its
peak.
ACE is adding one of the most well-known names in the U.S.
insurance industry. New Jersey-based Chubb is a leading provider of
homeowners' insurance to wealthy Americans through its Masterpiece
coverage. ACE also targets high-net-worth customers in its
personal-insurance business. Both companies have large operations
selling insurance to midsize businesses.
ACE shareholders will own 70% of the new company, which will
operate under the Chubb name globally.
The deal is a triumph for the second generation of the insurance
industry's first family. Evan Greenberg, chief executive of ACE,
will lead the combined company. Mr. Greenberg is the son of Maurice
R. "Hank" Greenberg, who transformed AIG from a low-profile,
middling company into a global financial-services powerhouse over
nearly four decades before he left the New York company in
2005.
The younger Mr. Greenberg, 60 years old, who worked at AIG for
25 years, said in an interview Wednesday that despite the
challenges facing the industry, the acquisition wasn't born of
necessity. "Most of the deals I see being done are being done
defensively, because of the pressures companies are feeling," he
said. "This deal is being done on the offensive."
Chubb CEO John Finnegan, 66, who was set to retire from the
insurer at the end of next year, will serve as executive vice
chairman for external affairs of North America and will assist with
the integration. Mr. Finnegan told investors in a conference call
that "there are some more reasons today that you might want to do a
merger of this type than maybe five years ago, but we weren't out
shopping it. This was a proposal that came to us and we thought it
was a very good one."
Combined, the companies will have shareholder equity of nearly
$46 billion and cash, investments and other assets of $150
billion.
"This is a landmark deal that puts two awfully good companies
together and forms a global powerhouse with deep and defensible
U.S. market penetration," said David Havens, a credit analyst with
Imperial Capital LLC.
The deal values Chubb at a 30% premium to Tuesday's close. Chubb
shares surged 26% to $119.99 Wednesday, while ACE edged up 0.8% to
$102.49. Chubb holders will receive $62.93 in cash and 0.6019 share
of ACE, valuing the company at $124.13 a share.
The deal came together in the past few weeks after Mr. Greenberg
approached Mr. Finnegan, the two executives said.
"I've been in the business for 40 years," Mr. Greenberg said in
the interview. "Chubb is not a stranger to me, I've competed
against them, I've admired them." Mr. Greenberg said he approached
a financial adviser whom he knew was well-regarded by Mr. Finnegan
and they all met in New York.
After that meeting, the companies and their bankers quickly
pulled the deal together, he said.
ACE was formed in the Cayman Islands in 1985 by 34 blue-chip
U.S. companies to provide then-hard-to-find excess-liability and
directors-and-officers coverage. It expanded in 1999 when it
acquired the property-casualty-insurance business of Cigna Corp. as
that company was narrowing its focus to health insurance. Last
year, ACE earned $2.9 billion with $17.8 billion in net premiums
written.
Chubb, which operates in 25 countries, last year reported a
profit of $2.1 billion on $12.6 billion in net premiums
written.
The combined company will be based in Switzerland, as ACE is.
The company said the deal isn't tax-driven and that it doesn't see
any significant change in tax rates for Chubb from the deal.
Broadly, merger-and-acquisition activity has been on fire this
year, driven by a range of factors including cheap debt, a
relatively stable economy, cash on balance sheets, rising stock
prices and a fear among executives of being left behind rivals who
strike deals.
ACE's bid for Chubb lands the deal near the top of the heap,
adding to the more than $2 trillion in M&A deals or offers
unveiled globally this year, according to Dealogic.
Evan Greenberg was his father's heir apparent when he left AIG
in 2000 and joined ACE the following year. He rose to the CEO post
there in 2004 and assumed the chairmanship in 2007. On his watch,
the company has expanded into new overseas markets, added
additional lines of coverage and grown to become one of the largest
property-casualty companies in the world. Since Mr. Greenberg
became CEO, ACE shares are up nearly 150%.
He has seen the company through the pricing swings that have
plagued the commercial-insurance sector.
In the U.S., ACE is now the 14th-largest property-casualty
company by premiums, according to 2014 rankings by the National
Association of Insurance Commissioners. Chubb is ranked 13th.
Combined, their premiums would make them the sixth largest, behind
Travelers Cos.
Mr. Greenberg said in an April earnings call that when it came
to doing potential M&A transactions, ACE looks at roughly 100
deals a year globally, and the company's executives "pull the
trigger very selectively. It's got to meet our strategy and meet
our standards." And given the pressures of low interest rates,
pricing concerns, growth issues and other factors facing insurers,
he predicted that deal activity would pick up.
"Wouldn't surprise me," he said.
Write to Leslie Scism at leslie.scism@wsj.com and Erik Holm at
erik.holm@wsj.com
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