The confirmed $65 a share preliminary offer from Chubb to buy The Hartford is equivalent to just 1.44x tangible book value, well below the price of $80+ per share or 1.8x tangible book value the US insurer would be expected to fetch, according to Wells Fargo analysts.

The Hartford share price

In an analysis piece late yesterday after The Hartford confirmed the unsolicited approach, this publication reported expectations from investor sources that a successful offer would likely need to be closer to the estimated 1.79x book value that Ace paid for Chubb five years ago.

And in a detailed note following Chubb’s announcement confirming an initial bid of $65 a share for its smaller rival, Wells Fargo analyst Elyse Greenspan said the offer falls short.

“We view the $65 per share (1.44x tangible book) as too low as we had expected [The Hartford] could warrant a price above $80 per share (or 1.8x tangible book),” she commented.

The Hartford’s shares ended the day up 18.7 percent at $68.15, above the Chubb initial offer price, implying that the market expects the Evan Greenberg-led insurance giant to up its offer or for counter bidders to emerge, or both.

The Hartford shares trade up 19% on Chubb bid

Chubb shares were down by 2.6 percent, compared with a 1.5 percent dip for the S&P 500.

Greenspan said she expects that if The Hartford is sold it will go for well above $65 per share.

At the initial Chubb offer price the estimated overall purchase price would be $23.5bn, which the analyst said could be financed with $9.4bn of cash – from excess capital – $4.6bn of debt and $9.5bn of equity.

It would represent a 1.44x multiple of tangible book value, which she estimated at $45.11 a share, and a 13.2 percent premium to The Hartford’s undisturbed share price.

Wells Fargo’s Chubb-Hartford merger assumptions

Greenspan suggested the fact that Chubb has stated that the majority of consideration would be in the form of cash may explain the lower-than-expected initial offer price.

The analyst modelled pro forma numbers for the deal that point to around 18 percent earnings per share accretion to current 2023 estimates if Chubb is able to buy The Hartford at $65 a share.

The analysis was based on an assumption of no revenue synergies but expense synergies of $700mn, or around 15 percent of The Hartford’s current expense base, partially offset by additional interest expense of $200mn associated with its estimated debt raise to fund the transaction.

She added that the deal at that price would also be accretive to book value, but dilutive to tangible book value.

Strategic sense

This publication reported yesterday that a key attraction to Chubb in buying The Hartford likely lies in the US insurer’s small commercial book of business.

And in a note last night, KBW analyst Meyer Shields said that while still early in the process, “this acquisition would make solid strategic sense for Chubb”, subject to deal price.

Based on a final deal price of $75 a share, Shields estimated at least 9 percent accretion to 2022E earnings per share.

“We think [The Hartford] would provide [Chubb] with significant scale and demonstrated expertise within small commercial, improving underwriting profit (reflecting both higher rates and [The Hartford’s] recent efforts) within middle market and global specialty, along with scale in both standard personal lines and group benefits,” the analyst commented.

If a deal is consummated, the combined Chubb and The Hartford entity would boast “superior scale and analytics” to most smaller competitors, enabling it to also “capably defend itself” against competition from large, strong competitors that have been ramping up in the small commercial segment.

Shields acknowledged that he had “clearly overestimated” the initial bid from Chubb, albeit that it was described by the suitor as preliminary.

He added that his own initial assumption of a $70-$75 a share offer to buy The Hartford describes where the deal is more likely to get done.

The analyst also commented on the timing of the deal, suggesting that the move from Chubb is not a cyclical play.

“We see it as Chubb permanently establishing or expanding its presence in several key strategic product lines. Our best guess is that the timing mostly reflects the fading macroeconomic risk associated with Covid, along with Chubb’s materially bolstered capital levels,” said Shields.

Rival bidders?

With Chubb’s initial offer well below expectations in investor circles, there is a likelihood that rival bidders may come into the frame.

The Insurer yesterday highlighted Berkshire Hathaway along with European giants Zurich and Allianz as potentially interested parties looking for scale in the US, particularly in the small commercial space.

Shields pointed to Berkshire and Travelers as potential bidders that could, “and should”, look for more scale among very small commercial accounts business.

“We are somewhat skeptical of Travelers’ prospects, as we think Connecticut regulators would be uneasy about potential job losses from two Hartford-based (more or less) companies combining, and we think agents would worry about having too much standard commercial business concentrated with a single carrier,” the analyst commented.

He added that large personal insurers such as Allstate or Progressive that have been looking to build out their commercial business could be interested, as could international buyers from either Europe or Japan.