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Replacing Chubb With Ace

|Includes: ACE Limited (ACE), CB, TRV

Chubb (NYSE:CB) spiked on news that it will be acquired by Ace (NYSE:ACE). I closed my position at $128, and started working on an update of my P&C valuations for Ace and Travelers (NYSE:TRV). In an article published here on Seeking Alpha in July 2014 I outlined a methodology for evaluating high quality P&C Insurance stocks, which correctly called out an intrinsic value of $119 for Chubb.

After applying the same method to Ace, I arrive at an intrinsic value estimate of $144, which will increase to $149 if and when the Chubb acquisition is completed.

This estimate does not rely on Ace being acquired as a catalyst. Any company that consistently trades for less than intrinsic value will increase in value more rapidly than the market, assuming its operations perform consistently. By holding Ace long-term, I anticipate receiving an annualized return of 10%, considerably in excess of any realistic expectation for the S&P 500.

In an article published here on Seeking Alpha in January this year I noted that the P&C industry has out-performed the S&P 500 over 5, 10 and 15 year periods. The three companies discussed today returned an average 13% over the past 10 years, primarily because they are chronically undervalued.

Travelers has an intrinsic value of $142, by the same line of thinking. I have a double size position, long Jan 2016 80 calls. I plan to roll out to 2017 within the next few months.

For ACE, I plan to establish a normal size position using the Jan 2017 80 calls.

These holdings are bond substitutes, to my way of thinking, but with better returns. After all, the primary asset the investor owns is the ability to receive the returns on a conservative bond portfolio.

I'm accepting some catastrophe exposure with that, for which the rewards greatly exceed the risk. I keep the positions right size.

Disclosure: I am/we are long TRV.

Additional disclosure: I expect to establish a position in ACE today.