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Higher premium

19 March 2021 By Jennifer Saba

Chubb is making a thin offer for Hartford Financial Services. The U.S. listed insurance firm proposed to take over its smaller rival for $23.2 billion. Once cost savings are factored in the terms look stingy. Chubb Chief Executive Evan Greenberg may have to stump up more.

A tie-up between the two companies makes strategic sense. Hartford, founded in 1810 and known for providing insurance for the only home President Abraham Lincoln owned, is a firm that caters to small businesses. The $73 billion Chubb, which insures larger companies, is dangling $65 per share in a mix of cash and stock. The price represents a 19% premium to Hartford’s close on March 10, the day before Chubb approached its target.

As befits an insurer, Chubb is being cautious. The premium it’s offering is worth $3.7 billion, on top of Hartford’s $19 billion undisturbed market value. To make that work, Chubb would need to cut around $450 million in costs, assuming $1 of pre-tax savings today has a present value of around $8. That’s 10% of Hartford’s expenses last year. But it’s less than the 16% that ACE targeted when it agreed to buy Chubb in 2015 and assumed its name. Chubb later raised its estimate to 20% of its pre-deal expenses.

Match that, and Chubb could wring out about $7 billion in additional value. Add that sum to Hartford’s undisturbed market value on March 10, and it could be worth more than $26 billion, or about $74.51 per share. Hartford’s shares were trading at around $67.84 in late morning trade on Friday.

Nearly a year ago Greenberg warned the industry could be destroyed if it was forced to make payouts against business interruptions caused by the pandemic. But better times are ahead and confidence is returning. Chubb may have to pay more, lest somebody else does.

 

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