WhatThe Chubb Corporation is trading higher by about 29% after the company announced that it signed a merger agreement with ACE Limited .
So whatThe Chubb Corporation has been a mainstay of acquisition rumors and speculation. Warren Buffett's Berkshire Hathawaywas often named as a possible suitor. The company's record of profitable underwriting, its digestible size, and its valuable customers -- corporate clients and high net worth individuals -- made it an attractive acquisition candidate.
Continue Reading Below
ACE agreed to acquire Chubb in a cash and stock deal which valued Chubb at a 30% premium to its closing price on June 30. Shareholders will receive $62.93 in cash, plus 0.6019 shares of ACE for each share of Chubb stock. In an interesting quirk, Chubb will continue to operate under its own name, while the combined company will adopt the Chubb name globally.
Now whatChubb's CEO, John Finnegan, planned to step down as CEO next year. During his tenure, Finnegan streamlined the property and casualty insurer, focusing it only on its most profitable lines. The move was profitable for shareholders, but it came at the cost of top line growth. Rather than retain earnings to expand its insurance capacity, most of Chubb's profits were returned to shareholders through dividends and share repurchases.
ACE may have better uses for Chubb's earnings power. ACE, which is led by Evan Greenberg, the son of former AIGCEO Hank Greenberg, has used its retained earnings and stock to fuel its growth by acquisition. The company has closed on $4 billion of acquisitions since the financial crisis, buying insurers in around the world from Thailand to Brazil. The acquisition of Chubb will be its largest ever.
ACE expects the transaction to be immediately accretive to earnings and book value. By year three, the company expects $650 million in annual expense reductions and revenue growth to result in an accretive benefit to the combined company's earnings per share and returns on equity.
The article Why The Chubb Corporation Soared 29% originally appeared on Fool.com.
Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.