Buy Hiscox on the back of ACE/Chubb deal, says RBC Capital

RBC Capital Markets recommended investors buy Hiscox on Wednesday on the back of ACE’s agreement to buy Chubb Corp for $28.3bn, having recently suggested the FTSE 250 insurer was too richly priced.

Swiss insurer ACE announced that it will acquire property insurer Chubb for a multiple of 1.8x book value, noted RBC.

“This, along with the recent deal in which Tokio Marine is set to purchase HCC Insurance Holdings for 1.9x book value, make us reflect on our initial conclusion that Hiscox's valuation is too rich to encourage a takeout,” the Canadian brokerage remarked.

RBC said that Hiscox trades on 1.7x its 2015 book value estimate. Previously, it had thought that this multiple would put off any possible acquirers due to the premium they would be required to pay.

However, “the recent deals for Chubb at 1.7x 2015E book value and HCC at 1.9x suggest that acquirers are happy to pay premium multiples for high quality businesses”.

The brokerage added that any fallout from the takeout of Chubb should benefit Hiscox’s growth in the US personal lines market.

It noted that Chubb has a strong franchise in the US in the high net worth personal lines business, while ACE has become increasingly focused on this customer group as well.

Although in the early stages of development, Hiscox continues to grow its US direct to consumer business along with its US SME business, said the brokerage.

“We believe that any premium attrition that could potentially be seen from the deal should speed up Hiscox's growth in this market,” said RBC.

“We expect Hiscox to continue its growth in these markets based on the customer service and excellent claims proposition that has proved successful in the UK.”

RBC rates the stock at ‘outperform’ with a 925p price target.

At 14:42, Hiscox shares were up 2.3% at 858p.