Global insurer giant Chubb Ltd. is offering to buy its rival Hartford Financial Services Group Inc for $23.24 billion. Chub’s offer of $65 per share in cash and stock is 13.2% more than Hartford’s closing price ($57.41) last week. Hartford said it was weighing the proposal.
Both Chubb and Hartford are well-established insurance companies with incredibly rich histories. Chubb’s origins can be traced back to 1882 when Thomas Caldecot Chubb and his son Percy started underwriting marine merchants. Today, Chubb is the largest publicly traded P/C insurance company that operates in 54 different countries. Hartford is even older, having been founded in 1810.
The acquisition offer, while unsolicited, was not that surprising considering that 2020 was a tough year for US insurance companies. By far, the most costly type of insurance claims P/C companies faced in 2020 were the Business Interruption claims. As the government-mandated lockdown was initiated, many businesses were unable to operate, which led to insurance claims being filed.
While the premiums for business interruption represent only 2% ($30 billion) of the global P/C market, the estimated global output loss for business interruption claims is $4.5 trillion. A recent court ruling in Chicago, which rejected a bid by an insurance company to dismiss lawsuits filed by clients, spells a potentially grim future for US insurers. In addition, the wildfires in California, an extremely destructive hurricane season, and civil unrest have raised policyholder claims through the roof. As such, the Chubb-Hartford tie-up could help both companies soften the blow.
While Chubb is one of the biggest insurers in the world, Hartford dominates the small business sector. Chubb’s interest in the latter is believed to be the main reason behind the acquisition bid.
If the deal is finalized, this would be the largest acquisition in the industry since ACE bought Chubb for $28.5 billion in 2016. Some analysts argue that the current offer undervalues Hartford and that the final price may exceed $29 billion.
When we take into account that previous deals in the P/C sector valued companies at 1.8 times their book value (in the case of Hartford, this would be over $30 billion), it seems probable that Hartford will use this information to negotiate a higher purchase price. After the proposition was made public, Hartford’s share value jumped by 20%.