Wednesday, February 17, 2016

37th AIM Student Equity Update: Chubb (CB): “Strategic Merger Allows for Better than Benchmark Performance”


Chubb Limited (CB, $111.54): “Nice Insurance for the Portfolio”
By: Conor Connelly, AIM student at Marquette University

Image result for chubb insurance new logo

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary

Chubb Limited (NYSE:CB) provides various insurance solutions including commercial, personal property, casualty, personal accident and supplemental health insurance, reinsurance, and life insurance. It is a Swiss-incorporated holding company with 21,000 employees.

• CB was originally added to the AIM International Equity portfolio as ACE Ltd. under the NYSE ticker, ACE. ACE was also a commercial property and casualty insurance provider as well as reinsurance.

• On July 1, 2015, ACE announced that it would strategically merge with Chubb in a deal valued at roughly $28 billion. The deal was approximately 50/50 stock and cash and finalized on January 14, 2016.

Key points: Chubb finished 2015 with a strong fourth quarter performance as EPS gained twenty cents on the year, reported at $8.62 versus 2014’s $8.42. The combined entity of Chubb and ACE will provide above-average returns moving into 2016 as they offer a differentiated stream of products in an industry where pricing is trending downwards.

CB’s 4Q earnings conference call on 1/27 stressed integration, investment income, and its tax rate. The company also pointed towards launching new growth initiatives in 2016 and integrating Chubb’s investment portfolio similar to ACE’s past portfolio. Their commercial lines market is expected to be more competitive moving forward as competition is greater for large accounts, wholesale business, and property coverages.

Chubb notes that in the U.S., rates are down 0.5% for general and specialty casualty insurance, up 5% for professional lines, and down 9% in property. International trends were similar. The merger between Chubb and ACE has positioned the company to take advantage of the current market and establish itself as an industry leader. 

What has the stock done lately?
ACE was pitched in September of 2015 at $101.30 with a price target of $121.43. In the midst of a macroeconomic backdrop and global sell-off, especially in the financial services industry, CB has managed to gain 10.1% and is halfway to its initial price target. Our original investment thesis, that the merger would propel ACE into the middle market and high net worth areas that it originally lacked market share, is beginning to play out. 

Past Year Performance: In the last 12 months, CB’s stock price has dropped from $112.96 to $111.54, representing a 1.3% loss. The company’s performance in the last year, however, is still strong compared to the benchmark. It is our view that CB will continue to grow as the resources and strengths of both ACE and Chubb propel the company forward.



Source: FactSet


My Takeaway

The ACE-Chubb merger combined two industry leaders that will operate more efficiently and effectively moving forward. While EPS in 2015 saw moderate growth, the key to maximizing shareholder returns moving forward will be margin expansion. As revenues increase with the marge of these two companies, we are confident that management will optimize efficiency in the long-term horizon. 

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