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ACE to Acquire Chubb: The Strength of a Healthy Balance Sheet

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Strategic rationale

With the acquisition of Chubb (CB), ACE (ACE) will be better positioned to compete with rivals including Warren Buffett’s Berkshire Hathaway (BRK-B), Allstate (ALL) and American International Group (AIG).

Together these companies form 10.52% of the Financial Select Sector SPDR ETF (XLF).

Chubb’s presence in the high-net-worth market, covering mansions and yachts, operations selling workers’ compensation, and commercial auto insurance, will benefit ACE. The companies have complementary, superior strengths in product, distribution, and customer expertise that will drive new opportunities in both developed and developing markets.

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ACE’s stock rose by 5% and Chubb’s stock rose by over 30% following the announcement of the transaction. In a July 1 release, ACE CEO Evan Greenberg said, “This transaction advances our strategy in a meaningful way and represents an outstanding opportunity to create significant value over a reasonable period of time.”

At a press conference, Chubb’s CEO, John Finnegan, said, “Combined, with a larger, stronger balance sheet, we will be even better positioned to compete and win in a market environment in which size, global reach, and differentiating capabilities are increasingly key to long-term success.”

Expanding ACE through acquisitions

ACE has seen expansion mainly through acquisitions under the leadership of Evan Greenberg. In the US, ACE is now the 14th largest property and casualty company, while Chubb is ranked 13th largest, by premiums, according to 2014 rankings by the National Association of Insurance Commissioners. The combined entity’s premiums would make it the sixth-largest insurer, behind Travelers Companies (TRV).

During an April earnings call, Greenberg said that the company looks at nearly 100 deals a year globally as potential merger and acquisition transactions. Its executives give the green light only very selectively, and only if a deal meets the company’s strategy and standards. Given the pressures of low interest rates, pricing concerns, growth issues, and other factors facing insurers, Greenberg predicted then that deal activity would pick up. Now it has.

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