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 GroupInc. 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.”
ENLARGE
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
– Article per the Wall Street Journal