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Chubb 2.0 to become a market-leading force

Ace's $28.5bn landmark acquisition of Chubb is set to create a dominant franchise in the P&C industry, in a deal primarily driven by growth opportunities.

With pro forma shareholders' equity of $43.6bn after transaction adjustments, "Chubb 2.0" would have an imposing presence in the global P&C market, ranking as the fourth-largest publicly traded insurer by book value.

According to our analysis, the combined entity would be positioned as the sixth-largest global P&C (re)insurance writer within our peer group on a 2014 pro forma basis, with gross written premiums of $34.8bn.

In addition, the business would be the second-largest US commercial lines insurer with combined direct written premiums of over $16bn, taking it beyond Travelers but still short of American International Group (AIG).

The combined company would also cement itself as a leader in the US excess and surplus (E&S) space, with 2014 pro forma E&S premiums of $1.6bn and a market share of around 5.5 percent. It would leapfrog the likes of XL Catlin, Zurich and WR Berkley to become the fourth-largest writer.

Ace said that it expects to realise "substantial annual incremental growth-related revenue" by 2020.

While Ace-Chubb will undoubtedly benefit from increased scale, the combination will likely serve as a headwind to smaller insurers struggling to gain scale in an increasingly competitive marketplace.

Speaking on a call regarding the transaction, Ace CEO Evan Greenberg said that the deal was based on "compelling" business combinations and "complementary strengths".

This is particularly true for US high net worth personal lines business, which will more than double from a 6.3 percent share of Ace's book to a 14.6 percent share of the combined entity's portfolio.

Ace has been building out its high net worth business in recent years and competing directly with Chubb, which is a market leader in the sector.

"We size that marketplace as in excess of $40bn. There are lots of companies that are serving the high net worth space, from Allstate... to State Farm, to Ace and Chubb and AIG," said Greenberg.

"If you look at us combined we are about $5bn - I see tremendous growth opportunity in that area," he added.

Greenberg also noted overlaps in areas such as global professional lines, a market where Ace-Chubb would become the leading insurer.

But he said that while both companies had a strong existing presence, Ace tended to dominate larger accounts while Chubb was stronger in other client segments.

Greenberg's rationale for the transaction received a largely positive reaction from analysts.

"The deal does appear to be a strategically good fit for Ace and at least on the surface a financially good deal for Chubb," remarked Bernstein analyst Josh Stirling.

Commenting on the transaction, Nomura analyst Cliff Gallant said that the Ace deal "solved" Chubb's succession issue and growth challenges, adding that size was "critical" in the current industry climate.

In October 2013, it was announced that Chubb CEO John Finnegan would retire at the end of 2016 having had his employment extended despite reaching retirement age by the end of 2014 - raising questions about who would take over afterwards.

Meanwhile, Keefe, Bruyette & Woods analyst Meyer Shields said that he believed Ace was adding more already-profitable lines of business to its toolkit, rather than pursing growth and hoping that size and expense synergies will 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 commented.

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