Upgrading to Neutral on valuation grounds

We are upgrading CB to Neutral. The stock is down 15% YTD, and has moved decisively through our price target of $135. Since we downgraded the stock two years ago CB has gained ~0.5%, an underperformance of 30% relative to the S&P500. CB's ability to generate additional synergies from its acquisition of legacy Chubb has proven insufficient to justify either the price paid (1.8x BVPS) or the multiple at which the stock was then trading. CB's P/BVPS multiple is back down to 1.1x (from 1.3x post acquisition), which seems more appropriate for a stock generating an operating ROE of just under 10% and with a cost of capital of ~9%. We therefore move to a Neutral rating but remain concerned that management may be gearing up for another large acquisition.