Chubb (CB) is one of the best managed insurance companies in the world. Prior to the merger of CB and ACE, these companies had raised their dividends for 33 and 22 consecutive years, respectively. With a forward-looking payout ratio below 30%, we expect the combined company's dividend growth to continue for many more years.
While a merger the size of ACE and CB's should naturally raise some concerns, we believe the deal is in good hands with ACE's experienced CEO and think it will make CB even more competitive and profitable once the integration is complete.
We like CB for our Top 20 Dividend Stocks portfolio and are optimistic about the company's long-term future.
Business Overview
ACE announced it was acquiring CB for $29.5 billion in July 2015, and the deal closed in January 2016. This deal created the sixth-largest U.S. property / casualty (P&C) insurer by premiums and brought together two conservative insurers with highly complementary business lines – ACE is more international and focused on large commercial accounts, and CB is stronger with middle-market companies and personal lines businesses. Insurance companies make money by writing premiums and investing proceeds for income before costs and claims need to be paid out.
By product line, the combined company generates 54% of its premiums from commercial P&C, 21% from personal lines, 17% from global accident & health and life, 5% from agriculture, and 3% from global reinsurance.
By geography, the combined company writes approximately 63% of its net premiums in the U.S., 14% in Europe and Africa, 10% in Asia, 8% in Latin America, and 5% in Bermuda and Canada.
Business Analysis
The combination of ACE and CB will provide the company with several competitive advantages, beginning with the size of the business. Insurance policies generally have little differentiation, which makes price an important selling factor.
ACE and CB combined to write over $30 billion in global net premiums last year, making them one of the largest players in their markets. With its massive base of premiums, the company can spread its operating costs over wider pool of customers to lower its policy costs, diversify its risks, and offer customers packaged policies that cover a number of types of insurance (CB now has one of the largest product portfolios in the global insurance industry).
Both of these companies have done an excellent job underwriting conservative policies. From 2010-2014, ACE and CB's average combined ratio was 90%, and it never ran at a loss (see below). The combined ratio measures an insurer's costs and claims as a percentage of the total premiums it has written. A ratio below 100% means that the insurance company is generating a profit from its policies and has been smart (or consistently lucky) about the risks it is willing to write policies for.
Source: Chubb Limited
As seen below, ACE's combined ratio over the past five years has averaged 6.2 percentage points lower than that of any major insurer in the world, underscoring the company's skill in understanding and appropriately pricing risk.
