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