This was subsequently confirmed by Chubb. On March 23, The Hartford issued a one-sentence response noting that it had rejected the unsolicited proposal. Yesterday morning, Chubb issued the mother of all non-responses to Hartford’s rejection of its bid.
On the surface, it might appear that Chubb was going to take its ball and look to play with others. However, after parsing the statement we believe that a potential merger is still in play.
“As demonstrated by our industry-leading returns and underwriting performance, we have created an unsurpassed franchise in the insurance industry and its most dynamic markets. We continue to have great confidence in our ability to capitalize on favorable commercial insurance market conditions.
"Our organization is totally focused, and we remain firmly committed to delivering significant value for our shareholders."
It continued: "Although we were disappointed that The Hartford chose not to engage in discussions regarding a strategic business combination, our shareholders demand of us, and we demand of ourselves, that we remain a disciplined acquiror with an uncompromising focus on the fair value of any institution that we could acquire.” [emphasis added]
Evan Greenberg is likely 50 steps ahead, and The Hartford’s response last week would have been anticipated based on the discussion surrounding the offer price of $65/share.
There was also an expectation that other bidders would emerge and throw their hat in the process.
This was confirmed over the weekend when new stories suggested that Germany’s Allianz is discussing its options with advisers regarding a competing bid. This story, however, noted a potential hurdle in the form of much lower potential synergies versus those which would be available in a Chubb-Hartford combination.
Below we evaluate three options faced by Chubb at this juncture:
Option 1 is to do nothing and continue slow-building out its SME offering. SME business has always been a missing piece for Chubb, so we view this option as having a low likelihood.
Option 2 would entail looking at the broader landscape for other options. Here we run into a problem. Below we show the top commercial franchises. Apart from The Hartford, there are no viable entities that will immediately leapfrog Chubb into being a top SME player. Chubb could potentially look at regional companies, however these deals arguably would not provide enough synergies or scale to justify the distraction.
This leads us to door number 3, where Chubb will wait patiently for others to reveal their cards and then present a case for longer-term value creation.
Yes, some shareholders have always said cash is king. But if market conditions are to be believed, Chubb could drive a combined entity to a double-digit ROE and potential specialty stock multiples.
Chubb does have a clear history where its consolidation efforts have generated 20%+ returns on capital as disclosed in its presentations. That might just be enough for The Hartford shareholders to end up choosing Chubb.
We don’t believe that this is the last we have heard from Chubb on The Hartford. Or, as Evan Greenberg says: “Stay tuned!”
