ACE/Chubb to stimulate further M&A frenzy

Re/insurer ACE’s planned acquisition of The Chubb Corporation is likely to spark even more consolidation in the market.

This is the opinion of Meyer Shields, managing director at Keefe, Bruyette & Woods (KBW), who added that the consolidation is likely to occur amongst commercial insurers which now have to re-evaluate whether they need similar scale-related advantages to maintain their own competitive positions.

“We think that this deal will remove even more premium volume from the reinsurance industry, exerting downward pressure on most reinsurance lines, and stimulating even more reinsurer consolidation,” said Shields.

He added that he expects most of Chubb's premiums that are ceded to ABR Re to come at the expense of the traditional reinsurance market.

KBW typically views large insurer mergers and acquisitions (M&A) as a modest negative due to reserve risk, integration-related potential distractions, and scepticism about whether bigger primary insurers typically produce better underwriting results. However, the company is optimistic about this deal for the three reasons.

Shields explained that Chubb has a well-deserved reputation for conservative underwriting and reserving that enormously mitigates the risk that its reserves will prove inadequate.

He added that although some employee distraction is probably inevitable, “we think the combination of an experienced, well-run acquirer and a high-quality, well-run acquisition target limits the likelihood of material bad decision-making”.

Finally, KBW views the deal as ACE adding more already-profitable lines of business to its toolkit, rather than pursing growth and hoping that size and expense synergies generate profits.

“There’s some overlap in domestic commercial and high net worth personal lines, but Chubb's main focuses are the US commercial middle market and global professional lines, while ACE's main focuses are large and upper middle-market commercial lines domestically, and a wide array of international commercial and low-to-middle income personal lines,” he said.