ACE buying Chubb for $28.3bn, will impact reinsurance and ILS demand

In a move that will have significant ramifications for the global reinsurance market re/insurer ACE Group has announced that it is to acquire competitor Chubb Group to create the world’s largest property and casualty firm.

At $28.3 billion this is a huge deal, dwarfing the other insurance and reinsurance merger and acquisitions deals that we have seen so far. This one also could have the widest felt ramifications for the reinsurance and also insurance-linked securities (ILS) sectors.

The combined company will be a reinsurance buying powerhouse, with shareholders’ equity of nearly $46 billion and cash, investments and other assets of as much as $150 billion.

ACE and Chubb are two of the largest reinsurance cedants in the world, with large programs utilising both traditional and alternative sources of reinsurance capacity.

Bringing together the two firms ensures that the amount of risk ceded to the reinsurance and ILS market will shrink, as efficiencies and duplication are found and eliminated.

However, with ACE having already set out its mission to extract as much premium from the risks it underwrites as it possibly can, see the firms internal reinsurance vehicle ABR Reinsurance Capital Holdings (ABR Re), the prospects of the combined company doing the same could erase a significant amount of its requirement for reinsurance capacity.

At a time when reinsurance rates and pricing remains at or near historic lows, the merger of two such large ceding companies is certain to affect their need for reinsurance capital.

Both ACE and Chubb use collateralized reinsurance capacity, with Chubb leveraging the catastrophe bond market as well, with its East Lane series of cat bond deals, for a portion of its reinsurance capital needs.

It’s to be expected that the combined company will spend a period of time further rationalising its reinsurance buying and developing a new strategy for ILS and use of alternative reinsurance capital tools such as ILS and cat bonds.

The ABR Re approach has demonstrated ACE’s intent to rationalise its risk transfer and extract as much value as possible from the risks it underwrites. The combined company, if following that strategy, could erode some reinsurance demand from the market entirely.

Clearly this is all about scale and access to business, with the two firms having complementary strategies and portfolios, to a degree and positioning them as the world leader in their field. However there will be some hard work to be done on bringing the insurers together and one area where they are sure to focus is on savings in reinsurance and risk transfer.

“We are thrilled to announce the acquisition of Chubb, a venerable company with a great brand,” commented Evan G. Greenberg, Chairman and CEO of ACE Limited. “This transaction advances our strategy in a meaningful way and represents an outstanding opportunity to create significant value over a reasonable period of time for both ACE and Chubb shareholders. We are combining two great underwriting companies that are highly complementary. We will make each other better and create a unique company in a class of its own that has greater growth and earning power than the sum of the two companies separately.”

John D. Finnegan, Chairman, President and CEO of Chubb, added; “This is a compelling transaction for all Chubb and ACE stakeholders. The combination brings together two highly respected and successful companies with complementary capabilities, assets and geographic footprints. We are confident that it will deliver strong value to Chubb shareholders, including an immediate premium and participation in the future growth and profitability of a well-positioned combined company. We are pleased that the combined company will adopt the Chubb brand and view this as an affirmation that both companies share a commitment to the attributes of quality and service the brand represents. We look forward to working together as we create a best-in-class global franchise in P&C insurance.”

“We will be well balanced with greater presence and capabilities in product areas that have less exposure to the commercial P&C cycle,” continued Greenberg. “We have complementary product strengths – where one of us is not present, the other is. Where one of us is strong, the other is even stronger. Where there is overlap in product, generally one of us is more present at the large end of the corporate market while the other is serving the smaller or mid-market segment. The data and insight we will gain from our respective skills and experience will allow us to do so much more. For example, Chubb will enhance ACE’s ability to serve the upper middle market, while ACE will provide more products to serve Chubb’s middle market clients, and our combined strengths will enable us to pursue the small and micro markets globally.

“Finally, we will benefit from each other’s complementary cultures, including a shared passion for underwriting discipline and outstanding claims service. Operating under the Chubb name, with sustained long-term underwriting profit and a larger invested asset base that will benefit from rising interest rates, we will take advantage of the growth opportunities and significant efficiencies to be gained between us. Together, we will grow more substantially and at a faster rate, producing greater earnings, than we could achieve as two separate companies. We look forward to welcoming the talented Chubb employees and their customers and distribution partners to the ACE family.”

The acquisition is expected to close in Q1 2016, after customary approvals have been received and shareholder votes undertaken.

After that the reinsurance market will find it has one less major ceding company to target and the ILS market may find one of its longest-serving cat bond issuers takes a different strategy.