Your SlideShare is downloading. ×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Mercer Capital's Value Focus: Insurance Industry | Q1 2014 | Is It Time for Banks to Rethink Insurance?

129

Published on

Mercer Capital’s Insurance Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to insurance brokers, underwriters, and other industry professionals. Each …

Mercer Capital’s Insurance Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to insurance brokers, underwriters, and other industry professionals. Each issue includes a segment focus, market overview, mergers and acquisitions review, and more.

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
129
On Slideshare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
1
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Value Focus © 2014 Mercer Capital // www.mercercapital.com // Data provided by SNL Financial 1 Insurance Industry First Quarter 2014 Tempered Stock Market Performance. Insurance stock performance was tempered in 1Q14, with the SNL Underwriter index posting a 0.44% return and the Broker Index advancing 1.25%, relative to the S&P 500’s 1.8% increase. Most sub-sectors actually posted modest declines, including life & health (-2.0%), multi-line (-2.2%), and property & casualty (-0.3%). The few bright spots were managed care (+6.9%) and mortgage & financial guaranty (+6.8%). Concerns regarding slowing reserve releases, continued rate pressures, and low investment yields continue to weigh on underwriters across nearly all segments. Rate Increases Easing. Price increases for commercial P&C products as well as personal lines continued to ease in the first quarter. In general, lower catastrophe losses in 2013, ample capacity, and rising competition have slowed the rate of price increases, which may bode negatively for brokers via lower commission income and for underwriters who may be forced to relax underwriting standards to retain business. According to MarketScout, the average increase among commercial lines accounts slowed to the range of 2-3% in the first quarter, compared to 3-4% in 4Q13 and 4-5% in 3Q13. Per the Council of Insurance Agents & Brokers’ quarterly survey, the overall average commercial insurance rate change dipped to 1.5% in 1Q14 from 2.1% in 4Q13. Slight Multiple Contraction. As shown in the attached charts of historical and current pricing by segment, price/book multiples of the SNL Indices pulled back somewhat in the first quarter of 2014. Multi-line carriers moved back from 1.14x to 1.08x, with L&H and P&C exhibiting similar results (currently at 1.20x and 1.31x, respectively). It’s important to point out that the SNL Indices are market-cap weighted so the performance of larger participants can have a material impact on the movement of the index. For insurance brokers, the EV/EBITDA multiple moved back only slightly from 12.2x at year-end to 12.0x at the end of first quarter 2014. M&A Deal Notes. Just 17 acquisitions of insurance underwriters were announced in the first quarter, down from 24 in the prior year. TPG Capital Management’s acquisition of Warranty Group from Onex Corp. was the largest deal announced during the first quarter, with consideration of $1.2 billion, plus assumed debt of $250 million. Financial details on Warranty Group were not disclosed. The other high profile transaction of the quarter was Brown & Brown’s $602.5 million acquisition of Wright Insurance Group. Per the investor slide-deck accompanying the announcement, the implied multiples on the transaction are 5.0x forward revenue and 10.2x forward EBITDA. While the Wright Insurance deal is technically classified as an underwriter transaction by SNL, the business purchased by BRO is not actually risk-bearing. The M&A market for insurance brokers in 1Q14 was strong relative to the prior year (72 deals in 1Q14 vs. 40 in 1Q13), owing to the tax-driven rush that accelerated closure of many prior-year deals into the fourth quarter of 2012. By comparison, there were 64 deals announced in 1Q12. Special Supplement Is It Time for Banks to Rethink Insurance? Page 6
  • 2. © 2014 Mercer Capital // www.mercercapital.com // Data provided by SNL Financial 2 SNL Insurance Broker and Underwriter IndicesSNL Insurance Underwriter Segment Indices Mercer Capital’s Value Focus: Insurance Industry First Quarter 2014 60.0! 80.0! 100.0! 120.0! 140.0! 160.0! 3/28/13! 4/28/13! 5/28/13! 6/28/13! 7/28/13! 8/28/13! 9/28/13!10/28/13!11/28/13!12/28/13! 1/28/14! 2/28/14! 3/31/14! March28,2013=100! S&P 500: 21.86% ! SNL Insurance Multiline: 35.17% ! SNL Insurance L&H: 43.97% ! SNL Insurance P&C: 13.38% ! SNL Reinsurance: 13.89% ! SNL Managed Care: 44.94% ! SNL Title Insurer: 21.83% ! SNL Mortgage & Finl Guaranty: 38.96% ! 90.0! 95.0! 100.0! 105.0! 110.0! 115.0! 120.0! 125.0! 130.0! 135.0! 3/28/13! 4/28/13! 5/28/13! 6/28/13! 7/28/13! 8/28/13! 9/28/13!10/28/13!11/28/13!12/28/13! 1/28/14! 2/28/14! 3/31/14! March28,2013=100! SNL U.S. Insurance Broker: 28.96% ! SNL U.S. Insurance Underwriter: 27.35% ! S&P 500: 21.86% ! M&A Activity Recap: Insurance UnderwritersM&A Activity Recap: Insurance Brokers Q1! Q2! Q3! Q4! YTD at 3/31! 2011! 24 ! 18 ! 32 ! 31 ! 24 ! 2012! 20 ! 26 ! 27 ! 20 ! 20 ! 2013! 24 ! 15 ! 19 ! 12 ! 24 ! 2014! 17 ! 0 ! 0 ! 0 ! 17 ! 0 ! 20 ! 40 ! NumberofTransactions! Q1! Q2! Q3! Q4! YTD at 3/31! 2011! 77 ! 59 ! 72 ! 83 ! 77 ! 2012! 64 ! 71 ! 56 ! 137 ! 64 ! 2013! 40 ! 41 ! 50 ! 74 ! 40 ! 2014! 72 ! 0 ! 0 ! 0 ! 72 ! 0 ! 20 ! 40 ! 60 ! 80 ! 100 ! 120 ! 140 ! 160 ! NumberofTransactions!
  • 3. © 2014 Mercer Capital // www.mercercapital.com // Data provided by SNL Financial 3 Mercer Capital’s Value Focus: Insurance Industry First Quarter 2014 SNL Life & Health IndexSNL Multi-Line Index SNL Property & Casualty Index SNL Reinsurance Index 3/31/1412/31/1312/31/1212/30/1112/31/1012/31/09 Price / LTM EPS 10.1921.617.685.1810.809.88 Price / Book 1.081.140.660.560.710.72 Price / Tang. Book 1.262.161.140.760.810.74 0.00 0.50 1.00 1.50 2.00 2.50 0.00 5.00 10.00 15.00 20.00 25.00 Price/Book Price/Earnings 3/31/1412/31/1312/31/1212/30/1112/31/1012/31/09 Price / LTM EPS 14.2416.5514.748.3511.7113.53 Price / Book 1.201.270.810.811.131.21 Price / Tang. Book 1.231.290.710.771.001.31 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 Price/Book Price/Earnings 3/31/1412/31/1312/31/1212/30/1112/31/1012/31/09 Price / LTM EPS 13.4814.8112.8415.9512.7018.26 Price / Book 1.311.381.121.121.131.09 Price / Tang. Book 1.611.651.381.451.401.30 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 20.00 Price/Book Price/Earnings 3/31/1412/31/1312/31/1212/30/1112/31/1012/31/09 Price / LTM EPS 8.6711.556.9822.939.4324.08 Price / Book 1.001.060.830.820.841.11 Price / Tang. Book 1.031.090.850.850.871.44 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 0.00 5.00 10.00 15.00 20.00 25.00 30.00 Price/Book Price/Earnings
  • 4. © 2014 Mercer Capital // www.mercercapital.com // Data provided by SNL Financial 4 Mercer Capital’s Value Focus: Insurance Industry First Quarter 2014 SNL Title Insurance IndexSNL Managed Care Index SNL Mortgage & Financial Guaranty Index SNL Insurance Broker Index 3/31/1412/31/1312/31/1212/30/1112/31/1012/31/09 Price / LTM EPS 14.8013.929.8910.728.6611.05 Price / Book 2.102.021.511.641.341.42 Price / Tang. Book 4.634.563.363.334.223.43 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 Price/Book Price/Earnings 3/31/1412/31/1312/31/1212/30/1112/31/1012/31/09 Price / LTM EPS 17.3514.449.3812.9610.9128.22 Price / Book 1.441.531.220.890.851.00 Price / Tang. Book 2.703.232.631.661.622.01 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 0.00 5.00 10.00 15.00 20.00 25.00 30.00 Price/Book Price/Earnings 3/31/1412/31/1312/31/1212/30/1112/31/1012/31/09 Price / LTM EPS 12.496.240.553.563.340.44 Price / Book 1.991.940.660.670.850.89 Price / Tang. Book 1.371.980.660.670.860.89 0.00 0.50 1.00 1.50 2.00 2.50 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 Price/Book Price/Earnings 12.012.2 9.69.3 10.4 8.1 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 3/31/1412/31/1312/31/1212/30/1112/31/1012/31/09 EnterpriseValue/LTMEBITDA
  • 5. Mercer Capital Insurance Industry Services Contact Us Copyright © 2014 Mercer Capital Management, Inc. All rights reserved. It is illegal under Federal law to reproduce this publication or any portion of its contents without the publisher’s permission. Media quotations with source attribution are encouraged. Reporters requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120. Mercer Capital’s Industry Focus is published quarterly and does not constitute legal or financial consulting advice. It is offered as an information service to our clients and friends. Those interested in specific guidance for legal or accounting matters should seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add your name to our mailing list to receive this complimentary publication, visit our web site at www.mercercapital.com. Mercer Capital provides the insurance industry with corporate valuation, financial reporting, transaction advisory, and related services. Industry Segments Mercer Capital serves the following industry segments: • Agencies • Independent insurance brokers and agents • Bank-owned agencies • Retail, wholesale, and MGAs • Ancillary • Third-party administrators • Claims adjusters and other service providers Mercer Capital Experience • Nationwide client base • Agency clients range from single office agencies to top-10 public brokers • Underwriter clients range from monoline privates to publicly traded multi-line carriers Contact a Mercer Capital professional to discuss your needs in confidence. Lucas M. Parris, CFA, ASA 901.322.9784 parrisl@mercercapital.com Travis W. Harms, CFA, CPA/ABV 901.322.9760 harmst@mercercapital.com Mercer Capital 5100 Poplar Avenue, Suite 2600 Memphis, Tennessee 38137 901.685.2120 (P) www.mercercapital.com • Underwriters • P&C, life & health, and managed care • Reinsurance • Captives and risk retention groups
  • 6. Value Focus © 2014 Mercer Capital // www.mercercapital.com // Data provided by SNL Financial 6 Insurance Industry It’s no secret that the number of insurance agency acquisitions by banks and thrifts has declined considerably over the last ten years. According to SNL Financial, an average of 60 agencies were purchased by banks annually between 2004 and 2008. Over the next five years, the average annual tally dropped to 27. The most likely reason for this decline is the effects of the recession and less capital available for investment. Interestingly enough, however, the number of agency divestitures by banks has been fairly constant at about ten per year. In the broader market for insurance agencies/ brokerages, transaction volume has only gotten more robust over the last ten years, including a record 361 deals completed in 2012. Private equity and strategic consolidators remain keenly interested in the sector. So is there any reason for banks to care about insurance anymore? A look at the numbers from some of the leading banks in insurance suggests that there is. We screened the universe of publicly traded banks for those institutions with at least $5 million in annual insurance revenue and for which insurance operations constituted a separate reportable segment. In other words, these are banks for which insurance operations are material, but the banks themselves are not so big as to dwarf the impact of the insurance revenue. Summary statistics for the 15 banks in our insurance-focused group are detailed below. The group is fairly evenly distributed by asset size, with the exception of BBT which is presented separately. Is It Time for Banks to Rethink Insurance? Insurance-Focused Banks by Size Average Insurance Revenue ($M) Average Insurance Net Income ($M) Share of Bank’s Net Income Share of Non-Interest Income (NII) 1) Assets: $500M - $1B $13.5 $1.3 16.3% 62.9% 2) Assets: $1B - $3B 9.4 0.3 1.0% 41.6% 3) Assets: $3B - $5B 17.3 2.0 4.4% 22.2% 4) Assets: $5B - $10B 25.5 2.1 3.7% 27.6% 5) Assets: $10B+, excl BBT 53.8 5.0 3.7% 21.5% 6) BBT 1,517.0 188.0 10.9% 39.4% 7) Overall Average (15 banks) 126.5 14.8 4.9% 33.5% SOURCE: SNL Financial. Screen limited to banks with > $5M in insurance revenue and for which insurance operations constitute a separate reportable segment (15 total). Figures reflect FY2013 results. Insurance Focused Group includes: 1) Assets: $500M - $1B: EVBN, ONFC; 2) Assets: $1B - $5B: COBZ, GABC, SHBI; 3) Assets: $1B - $5B: TOWN, STBA; 4) Assets: $5B - $10B: ONB, BHLB, TMP; 5) Assets: $10B+, excl BBT: FNFG, FNB, BXS, TRMK by Lucas M. Parris, CFA, ASA parrisl@mercercapital.com
  • 7. © 2014 Mercer Capital // www.mercercapital.com // Data provided by SNL Financial 7 Mercer Capital’s Value Focus: Insurance Industry First Quarter 2014 The most striking observation is the large share of non-interest income that these banks derive from their insurance operations. A consistent theme among banks for the last several years has been pressure on service charges on deposits. In fact, over the last five years, income from this line item has actually declined by 10.5% on average for banks in the $500M-$1B asset-based UBPR aggregate peer group.The results for the next two tiers, the $1B-$3B and $3B-$5B asset groups, were average declines of 4.2% and 3.5%, respectively. Growth in insurance-related revenue averaged 6.6% annually over the last five years for the insurance-focused group. So while the insurance-focused banks face similar pressures with respect to the traditional components of non-interest income, their insurance operations have provided a surprisingly strong source of growth. The following chart compares the growth in overall non-interest income for the insurance- focused banks and their corresponding size-based peer groups. It is clear that for those banks already in the insurance business, the revenue derived from this segment has provided a much-needed source of non-interest income and growth in an otherwise difficult operating environment. And for banks searching for new sources of non- interest income, insurance may offer a compelling opportunity. What are the key factors to consider when purchasing an agency? First, we would suggest that the investment not be predicated solely on the basis of the cross-selling opportunities.Questions about whether the bank can provide leads to the agency (and vice versa) are important and meaningful, but should you as a buyer pay upfront for these things? A better way to approach the issue is to look for an agency with a stable, recurring revenue stream that can contribute to non-interest income and help diversify the bank’s earnings. An agency that already has an existing client base and recurring commissions can then be leveraged to achieve synergies with the bank. The insurance business is a personal, sales-oriented business.Revenue is primarily commission- based, and growth is driven by rate (hard vs. soft market) and exposure units (volume). The biggest expenses are people, including commissioned producers to sell business and a quality support staff to service the business and provide customer service and claims support if necessary. Margins in the industry vary by size and product focus, but for the insurance-focused bank group, the average after-tax margin on insurance revenue was approximately 9.0% in 2013. The preferred metric in the agency/brokerage industry is EBITDA margin (earnings before interest, taxes, depreciation, and amortization), which certainly sounds out of place in the banking world, but is nevertheless the base upon which performance is assessed and deals are struck. EBITDA margins for the insurance segments in the bank group highlighted above range from the mid-teens to mid-twenties. Average return on equity for insurance agencies is also higher than for banks because the businesses do not require a large balance sheet. For example, the median return on equity over the period 2009 through 2013 for banks with assets of $1-$10 billion was 6.9% per SNL Financial, compared to 13.6% for the five largest publicly traded insurance brokers. Other key considerations when evaluating potential agency acquisitions include concentrations (customer/producer/carrier), technology and compliance issues, and cultural fit. Concentrations add risk, especially if a large portion of the business resides with one key producer or owner. For bank acquirers especially, technology and privacy compliance issues could also create unanticipated challenges post-transaction if certain systems and procedures are not thoroughly investigated in due diligence. Cultural fit is hard to define but can either speed along the integration/transition process or threaten to derail it altogether. How much should a bank pay for an agency or book of business? Rules of thumb can be dangerous, especially those metrics based on revenue, which ignore profitability. Most buyers
  • 8. © 2014 Mercer Capital // www.mercercapital.com // Data provided by SNL Financial 8 Mercer Capital’s Value Focus: Insurance Industry First Quarter 2014 and sellers tend to focus on adjusted EBITDA for the most recent year or perhaps a pro forma to normalize for non-recurring expenses and income. Transactions are more often than not structured as asset purchases and frequently involve multi-year earn-outs. Purchase prices usually involve a large upfront payment, followed by earn-outs based on future profitability or client retention targets. Because key owners and producers are often asked to stay on for a transition period post-sale, earn-outs serve the dual function of protecting the buyer and motivating the seller by providing for enhanced proceeds if the acquired agency performs above expectations. Expanding into the insurance business might not be the best option for all banks but it’s clearly an avenue for growth and income diversification for those that can spot the opportunity. Once a platform bank agency is established, the existing regional and community bank branch footprint can be used to expand the model and grow the business. That’s an advantage that potential non-bank acquirers do not have. So while the transaction statistics might suggest that bank- owned agencies are a thing of the past, the performance of banks already in the business indicates that the model works – and that valuable opportunities may reside just down the street. Mercer Capital provides financial institutions with corporate valuation, financial reporting, transaction advisory, and related services. To discuss your needs in confidence, please feel free to contact us. Financial Institutions Mercer Capital’s largest industry concentration is financial institutions. The unifying element of Mercer Capital’s services for financial institutions is its in-depth industry knowledge, gleaned from 30 years of experience and over 1,000 engagements. Asset Management Mercer Capital provides asset managers, trust companies, and investment consultants with corporate valuation, financial reporting valuation, transaction advisory, portfolio valuation, and related services. Business Development Companies Along with private equity and other investment funds, BDCs provide billions of dollars of investment capital to private companies in every segment of the economy. For over thirty years, Mercer Capital has met the valuation needs of the same middle market companies to which BDCs and other funds provide capital. Depository Institutions Mercer Capital assists banks, thrifts, and credit unions with significant corporate valuation requirements, transactional advisory services, and other strategic decisions. Financial Technology Mercer Capital provides the financial technology industry with corporate valuation, financial reporting, transaction advisory and related services. Insurance Companies Mercer Capital provides the insurance industry with corporate valuation, financial reporting, transaction advisory, and related services. Specialty Finance & Real Estate Companies Mercer Capital provides specialty financial companies and REITs with corporate valuation, portfolio valuation, financial reporting valuation, transaction advisory, and related services. Mercer Capital provides the insurance industry with corporate valuation, financial reporting, transaction advisory, and related services. Contact Lucas M. Parris, CFA, ASA 901.322.9784 parrisl@mercercapital.com Travis W. Harms, CFA, CPA/ABV 901.322.9760 harmst@mercercapital.com MERCER CAPITAL 5100 Poplar Avenue, Suite 2600 // Memphis, TN 38137 // 901.685.2120 www.mercercapital.com

×