The Insurer In Full: Low bid from Chubb puts The Hartford firmly in play
At just 1.44x estimated tangible book value, Chubb’s preliminary offer of $65 a share for The Hartford looks to be little more than an opening gambit and puts its smaller rival firmly in play for counter bids...
When news of Chubb’s move first broke with Bloomberg’s report yesterday there was initially no detail on price. That led investor sources and analysts to suggest that The Hartford would warrant a price somewhere near the 1.79x book value mark that Ace paid for Chubb five years ago.
Confirmation from Chubb later in the day of a $65 bid was met with surprise in some quarters, and an expectation that it would likely be stepped up and also likely draw other suitors out of the shadows.
The Hartford’s board came out with the predictable comments about carefully considering the proposal and acting in the best interests of shareholders over the long term, while Chubb said it looks forward to “constructive, private discussions” to expedite a “fair transaction”.
But The Hartford has been the subject of interest from other players in the past that may be rekindled, including domestic players looking to add scale and overseas buyers seeking to gain critical mass in the US.
In the dark days of the financial crisis – when The Hartford’s share price slumped to below $5 – Allianz bought in with a $2.5bn investment while Travelers and others were linked with a move for the carrier’s P&C operations as it faced the prospect of being broken up.
In the more than a decade since then The Hartford has done an admirable job of rehabilitating itself.
Crucially it was finally able to offload the variable annuities business that was the cause of its woes with its sale of Talcott Resolution three years ago after ceasing selling the products back in 2012.
The insurer has also been reshaping its ongoing business, with acquisitions including the $1.45bn deal to buy a benefits book including life and disability income products from Aetna in 2017, and its 2019 acquisition of specialty insurer Navigators for $2.1bn.
And it has taken steps to cap exposures to prior-year liabilities, with a 2017 reinsurance transaction with Berkshire Hathaway to cover asbestos losses and an adverse development cover with the same counterparty two years later related to its Navigators acquisition.
The repositioning and resolution of the bulk of its legacy issues has made The Hartford a more compelling – and safer – acquisition for buyers of scale looking for a major strategic acquisition.
Chubb is likely to have been attracted to The Hartford’s highly regarded $3.7bn small commercial business.
It will also see the carrier’s personal lines book as complementary, with its standard auto and home products marketed through an exclusive relationship with AARP – the non-profit organisation that provides a range of benefits to its over 50s membership – that has recently been extended through to 2033.
In contrast, Chubb’s personal lines book is focused on high net worth business. The Hartford also has a significant group benefits business.
Chubb will not be alone in finding elements of The Hartford’s business attractive. As a platform that also includes a significant middle market to large account business and a global specialty arm, the carrier could tick the boxes for a number of potential buyers looking to gain scale in multiple segments.
Sources have identified Berkshire Hathaway as looking to grow in the small commercial space along with Travelers, while some personal lines players such as Allstate and Progressive have also been looking to diversify their portfolios through acquisition.
European interest may be renewed too. Allianz sold down a chunk of its warrants some time ago but along with Zurich is typically mentioned in dispatches when US carriers of scale are seen to be in play.
Having cleaned up its act, The Hartford has arguably been in play since the Talcott sale, with some at the time speculating that its move for Navigators was a defensive strategy to ward off interest.
With Navigators and the Aetna benefits business now almost fully integrated the stage is set, and the Chubb move could just be the curtain raiser for the main event.
Recently sources have questioned whether major carrier M&A would feature at this stage of the pricing cycle.
As this cycle is driven by the need to drive better returns rather than a capital shortfall, suitors such as Chubb have plenty in the coffers, however. It seems only a matter of time before some will begin to meaningfully deploy those funds.
That means it is surely a case of when, and not if, The Hartford is sold at a price that will satisfy its shareholders.
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