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EXECUTIVE INSIGHTS

US Insurance M&A Round-up: 2012

2013


Table of Contents 1. US Insurance M&A review 2012 ....................................................................................... 3 1.1 U.S. Insurance Industry Key M&A Themes ...................................................................................... 3 1.2 US Financial Services M&A ............................................................................................................... 4 1.3 US and Canada Insurance M&A........................................................................................................ 5

2. Future outlook ................................................................................................................. 8 3. Some of the prominent US Insurance Deals Announced in 2012 ....................................... 9 4. References ..................................................................................................................... 10

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1. US Insurance M&A review 2012 M&A activity was strong in the first quarter of 2012, but slowed in the next two quarters, due to concerns about the U.S. economy and economic conditions elsewhere and finally turned around significantly in the fourth quarter, where we saw a substantial uptick in activity in most sectors, which may well set the stage for a strong 2013. Limited organic growth opportunities, excess capital in the hands of insurers and PE firms, improved corporate confidence with well doing stocks make fundamentals for future M&A market strong enough to maintain or beat past trends. Implications of Solvency II are still uncertain but it could lead to strategic activities among companies in the form of exiting certain business lines. The U.S. insurance industry saw 80 deals with a value of USD2,801.2 Mn in the year ending March 31, 2013 compared to 77 deals with a value of USD1,438.3 Mn in the year ending March 31, 2012. Although the number of deals rose by only 4% from 2012 – 2013, the deal value almost doubled at 95% rise.

1.1 U.S. Insurance Industry Key M&A Themes Private equity firms have continued to play a central role in the insurance M&A market and have been active deal participants in 2012, both as buyers and sellers. Private equity-led transaction activity has taken all forms, including monetization of previous investments, new investments, and add-on acquisitions through existing portfolio companies. Strategic activity in the US insurance market has focused on the expansion of specialty underwriting expertise, distribution capabilities, and geographic market presence as a result of which there have been few consolidation transactions in 2012. In the life sector, non-U-S- insurance carriers drove the strategic activity in the form of both acquisitions of legal entities and reinsurance transactions. One of the largest of such activities is the sale of the U-Sannuity business of Industrial Alliance Insurance by two of the associates of Guggenheim Capital (Security Benefit Life Insurance Co. and Equitrust Life Insurance Co.) for USD800Mn through a reinsurance transaction. Hartford’s restructuring also resulted in a number of transactions that include USD400Mn acquisition by Massachusetts Mutual Life Insurance Co. of its retirement plans business and another by Prudential Financial of its individual life insurance business.

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US M&A market has also seen a considerable presence of runoff specialists who have turned their attention to this sector because of challenges faced in the P&C and life & annuity sectors. In one such run-off transaction, Enstar Group announced in August that it will acquire SeaBright Holdings for USD250 Mn. In the life and annuity sector, Athene’s wholly-owned subsidiary, Athene Annuity & Life Assurance Company, announced the acquisition of Presidential Life Corporation for USD414 Mn in July. These acquisitions have been done to increase market reach and efficiency of operating environment.

1.2 US Financial Services M&A US Announced Financial Services Deals

In the US financial services, the Mergers and Acquisitions (M&A) activity in terms of deal volume was almost flat in 2012 as compared to 2011, but was significantly low than the 2010 level. Announced deals marginally increased 768 in 2012 from 756 in 2011, but deal value fell to USD62.4Bn in 2012 from $72.1Bn in 2011. In the US insurance market, the M&A activity has remained fairly active during 2011-12, with the focus shifting away from the property and casualty sector to the life insurance and brokerage sectors.

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1.3 US and Canada Insurance M&A Summary of Reported Transactions from 2000 through 2012

The year 2012 witnessed 291 announced agent-broker M&A transactions, the largest number since 2000, surpassing 284 experienced by 2008. Quarter-wise Distribution of Reported Transactions from 2008 through 2012

The year saw a mixed bag of M&A transactions: The first quarter began on a high note with 72 transactions being announced, which dropped to 61 in the second quarter and remained flat in the third quarter. The last quarter topped it with 97 announced M&As.

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Most Active Buyers

(*) Privately owned until acquired by Fidelity National Financial on Dec 31, 2012

Six companies announced 10 or more transactions in 2012, led by Gallagher at 30 (10%). Gallagher was followed by Hub International - 21 transactions (7%), Confie Seguros - 18 (6%), Assured Partners – 17 (6%), Brown & Brown - 15 (5%), and USI Holdings - 10 (3%). Buyers by Type Classification

Privately-owned companies in the aggregate represent the highest number of buyers with 93 ownerships, followed by private equity-backed players with 86 and publicly-owned players, 67. However, the ownership density pattern by buyer type is differently distributed. Here, publicly-owned Gallagher announced the highest number of transactions (30), followed by three PE-backed players – Hub International (APAX) (21), Confie Seguros (ABRY Partners) (18) and Assured Partners (GTCR) (17). On the other hand, although privately-owned companies have announced the most number of transactions, only two players – Digital Insurance (acquired by Fidelity National, Dec 2012) and Ryan Specialty – represent ≥ 5 transactions, i.e. only 15% transactions of the group.

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Percentage Distribution of M&As by Seller Type

Of the companies up for sale, over one-third were P&C players, a little over a quarter were Employee Benefits (EB) and P&C firms, and a little less than a quarter being pure EB firms. A number of EB-focused firms may have felt the pressure due to PPACA, and thereby, partnered with a larger organization to maintain a competitive edge.

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2. Future outlook M&A activity would continue to be the major form of growth for the publicly-traded brokers and would also be an interesting investment vehicle for PE-backed players. The increased (record breaking) M&A activity of 2012 is unlikely to continue in 2013 due to lack of tax-driven seller motivation and absorption of a large part of the available seller inventory. The buy-side of the industry would be strong and active and some part of the 2012 momentum will likely continue into 2013 irrespective of the current higher capital gains tax rates and the PPACA surtax for some companies. Sellers are likely to adapt to the new tax rates. Possibly, new PE backed firms to add to the already competitive atmosphere as the current crop of PE backed acquirers remain active. The Insurance Agent-Broker M&A industry is expected to remain fragmented with larger number of well-positioned buyers and thousands of potential sellers.

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3. Some of the prominent US Insurance Deals Announced in 2012

Majority of the top 10 deals are in the Life & Health segments, barring two in Brokerage and one in P&C segment. These top 10 deals represent more than 80% (USD8,422 Mn) of the deals in 2012**. Total disclosed deal value was close to USD10,128 Mn. ** Analysis on disclosed deal values only.

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4. References Factset: US M&A News and Trends, April 2013 Optis Partners: Agent-Broker Mergers & Acquisitions 2012 – A Year in Review Thomson Reuters Secondary research, News articles

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Us insurance m&a round up 2012