Mergers & Acquisitions in the Property/Casualty Insurance Market
-
Upload
lillian-hughes -
Category
Documents
-
view
42 -
download
0
description
Transcript of Mergers & Acquisitions in the Property/Casualty Insurance Market
685 Third Avenue • New York, New York 10017 • (212) 497-4100 • www.hlhz.com
Los Angeles • New York • Chicago • San Francisco • Washington D.C. • Minneapolis • Dallas • Atlanta • London
H O U L I H A N L O K E Y H O W A R D & Z U K I N
Mergers & Acquisitions in the Property/Casualty Insurance
Market
Casualty Actuaries of Greater New York
Spring 2004 Meeting
June 3, 2004
2
Agenda – Property & Casualty Insurance
• Industry Fundamentals
• Historical M&A Trends
• Recent M&A Trends
• M&A Outlook
3
Overview
• P&C consolidation has declined markedly and relatively steadily over the past five years
• Transformational deals are out of favor
– St. Paul / Travelers is the exception, not the rule
• Going forward, P&C acquisition activity should increase as rates soften and organic growth is more challenging
– However, M&A activity will be more thoughtful, as quality insurers consolidate and diversify with smaller niche acquisitions
Industry Fundamentals
5
Story of 2000 – 2004
The Race Between Premium Prices and Development
6
Decelerating Hard Market
• Property & Casualty companies enjoyed an extended run of rate increases beginning in 2000
• Overall rates have begun to fall back to the levels last seen in late 1999, the end of the last soft market cycle
– Increases began to decelerate in 2003
– Property has softened (large account)
– D&O and Med Mal still rising
• Question is whether the casualty lines have caught up after years of under-reserving
7
Decelerating Hard Market
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Fall 98 Spring 99 Fall 99 Spring 00 Fall 00 Spring 01 Fall 01 Spring 02 Fall 02 Spring 03
Personal Auto Homeowners Commercial Lines
Fall 03
Average Commercial and Personal Lines Rate Changes
8
Adverse Reserve Development
• The rating agencies are skeptical of the capital position of many insurers
– Fitch estimates the reserving shortfall to be $77 billion
• Asbestos – no trust fund and no end in sight
• M&A Impact: Given the magnitude of the downside, prudence has dictated caution among would-be acquirors given sellers’ natural information advantage
9
$250
$275
$300
$325
$350
$375
1999 2000 2001 2002 2003
$ B
illio
ns
0.75 x
1.00 x
1.25 x
1.50 x
NP
W /
Su
rplu
s
Industry Surplus Operating Leverage
Capital Turning the Corner
• The tragedy of September 11th, adverse loss development and the equity markets devastated the P&C sector’s surplus
• Thanks to the hard market, the industry is now generating a torrent of cash flow and surplus has surpassed 1999 levels, assuming proper reserving
22%
10
Capital Management
What to do with the build up of surplus?
• Increase Dividends
– With the new tax laws, dividending is an attractive option
– Montpelier Re increased its dividend yield to nearly 4% in 2003
• Growth through Acquisitions
– Buyers may be able to take advantage of smaller insurers which have been weakened by capital pressures and rating agency actions
– Many of the Bermuda players have picked off liability-free business from weakened peers
Historical M&A Trends
12
M&A Drivers
M&A DriverP&C InsuranceApplicability
Technological Change
Financial Markets
Management/Personality
Regulatory / Political
Focus / Diversification
13
Fragmented P&C Insurance Market
2,700
2,800
2,900
3,000
3,100
3,200
3,300
3,400
3,500
3,600
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
Nu
mb
er
of
P&
C C
om
pa
nie
s
14
Deal Volume – Relatively Cyclical
• Not surprisingly, P&C insurance M&A deal volume is reasonably cyclical
0
2,000
4,000
6,000
8,000
10,000
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
YTD
Tota
l M
&A
Deals
An
nou
nced
0
20
40
60
80
100
120
P&
C M
&A
Deals
An
nou
nced
Total M &A Activity P&C M &A Activity
15
31-Jul-200031-Aug-200029-Sep-200031-Oct-200030-Nov-200029-Dec-200031-Jan-200128-Feb-200130-Mar-200130-Apr-2001
31-May-200129-Jun-200131-Jul-2001
31-Aug-200128-Sep-200131-Oct-200130-Nov-200131-Dec-200131-Jan-200228-Feb-200229-Mar-200230-Apr-2002
31-May-200228-Jun-200231-Jul-2002
30-Aug-2002
0
20
40
60
80
100
120
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
YTD
P&
C M
&A
Deals
Announce
d
P&
C R
ate
P&C M &A Activity
P&C M&A Activity• Generally, deal volume is inversely correlated with P&C rates
P&C rates
16
1.00 x
1.20 x
1.40 x
1.60 x
1.80 x
2.00 x
2.20 x
2.40 x
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Pri
ce-t
o-B
oo
k
2.00 %
3.00 %
4.00 %
5.00 %
6.00 %
7.00 %
8.00 %
9.00 %
10.00 %
Inte
rest
Rat
e
Price-to-Book US 10 Year Treasury Yield
Valuations and the Cycle
• The interplay between interest rates and P&C rates impacts P&C company valuations as well as deal volume
Asbestos; Product Liab.
Hurricane Andrew 9/11
P&C rates
Recent M&A Trends
18
Is Hank right?
“…[T]wo drunks helping one another home…” - Hank Greenberg on P&C acquisitions
19
Recent M&A Activity: A Look Back
• Large transactions on the decline
– Bifurcation – strong grow and weak pare back or run-off
– Renewal rights deals flourish as buyers have the upper hand
• Bermuda Class of 2001
– Filling the capacity shortfall
– Cash flowing and surplus spiking…
• Focus and rationalization
– Pendulum swings away from diversification
– Sponsored spin-offs rise in popularity
20
The Death of the Mega-Deal?• There have been 44 P&C mergers valued at $500 million or more
since 1997 but all but five occurred in the 1997 – 2001 period
Source: SNL DataSource
71 83 52 45 48 40 43 2
315
11
15
7
0
20
40
60
80
100
120
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Nu
mb
er
of D
ea
ls
$-
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
Deals less than $500 mm Deals greater than $500 mm Deal Value
21
Deal Valuations Decline
• Median multiples have declined drastically over the last few years but may be on the rise again
--
0.50 x
1.00 x
1.50 x
2.00 x
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Pri
ce-t
o-B
oo
k
--
5.0 x
10.0 x
15.0 x
20.0 x
Pri
ce-t
o-E
arn
ing
s
Price-to-Book Price-to-Earnings
22
The Rise of Renewal Rights Transactions
• Renewal rights deals have become increasingly popular given market skepticism regarding the adequacy of reserves
• Competition for growth in soft cycle should cause a decline in renewal rights deals
0
10
20
30
40
50
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Nu
mb
er
of D
ea
ls
Renewal Rights Deals Other Asset Deals
23
Bermuda: Consolidation?
• Newer Bermuda players focused on secondary offerings, providing original venture investors a chance to reduce positions
• To date in 2004, a total of 15 insurance offerings have priced, raising $4.9 billion with selling shareholders receiving 77% of those proceeds.
• Starting in 2005, the Bermuda players will contend with slowing growth
• Some of the Bermuda insurers have already begun to participate on the M&A front by purchasing the renewal rights of weaker competitors
Buyer Transaction
XL Capital Renewal rights of DPIC Companies from RSA
Endurance Specialty Renewal rights of HartRe
AXIS Capital Renewal rights of Kemper Insurance
Arch Capital Renewal rights of CNA's Liability Insurance Business
24
Past as Prelude: Bermuda Class of 1993
Source: A.M. Best, Bermudan Business, Aon Capital Markets
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Cum
ulat
ive
Cap
ital R
aise
d ($
mm
)
1993 1994 1995 1996 1997 1998
IPO Stage M&A Stage
Partner Re. Ltd.IPO Nov. 1993
Global Capital Reinsurance Ltd.Sold to Exel Ltd. Jun. 1997
Global Capital Reinsurance Ltd.IPO Dec. 1995
LaSalle Re. Ltd.IPO Nov. 1995
LaSalle Re Merged with Trenwick Oct. 2000
Centre Cat Ltd.Sold to Ace Ltd. Apr. 1998Tempest Reinsurance Co.
Sold to Ace Ltd. Jul. 1996
IPC Holdings Ltd.IPO Mar. 1996
RenaissanceRe Holdings Ltd.IPO Jul. 1995Mid Ocean Ltd.
IPO Aug. 1993Mid Ocean Ltd.Sold to Exel Ltd. 1998
Companies that went public and later were acquired
Companies that went public and expanded beyond their original mandate
Companies that remained private until acquired
25
Rationalization
• Verdict: focus is the safe bet
– Management is heeding the Street and divesting
– Examples: Safeco, CNA, RSA and Zurich
• Contra-case
– Diversification: risky but necessary?
26
Divestiture Mechanism: The Spinoff
• As profitability and competition have become increasingly challenging, many insurers are focusing on core markets
• In addition to divestitures, insurers have taken advantage of the capital markets by spinning off more profitable businesses
Company IPO Amount Parent
Assurant $1.76 billion Fortis
Genworth $3.8 billion General Electric
Affirmative Insurance $259 million Vesta
Travelers $4.3 billion Citigroup
M&A Outlook
28
Outlook
• Soft Cycle Spurs M&A activity– Bermuda consolidates again…– Diversification returns?– New hybrid capital – prolonging the inevitable?
• Russian Roulette Returns?– Sellers gain leverage and liabilities back on the table
• Specialty consolidation and the return of the roll-up– WC, E&S and NSA
• Focus on expenses in downturn– Outsourcing?
• Europeans bargain shoppers– Weak dollar could tempt buyers