Mercer Capital's Value Focus: Insurance Industry - Q2 2013

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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.

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Mercer Capital's Value Focus: Insurance Industry - Q2 2013

  1. 1. Value Focus © 2013 Mercer Capital // Data provided by SNL Financial 1 Insurance Industry Second Quarter 2013 What to Make of Higher Interest Rates? The Federal Reserve’s June 19 statements regarding the tapering of asset purchases caused quite a ripple in the fixed income markets. For insurers, particularly the Life & Health sector, the prospect of rising interest rates could help boost investment income and create opportunities for the sale of more interest rate sensitive products. The SNL Life & Health Index significantly outperformed the S&P 500 during the second quarter (+17.3% versus +2.9% for the S&P), and Multiline insurers followed suit, up 14.7%. The P&C Index moved in line with the market (+2.6%). Subsequent to the quarter-end, Moody’s issued a note stating that gradually increasing interest rates combined with an improving economy could prompt the rating agency to change its outlook on the U.S. life insurance sector from negative to stable. Renewal Rate Increases Steady. According to MarketScout, the overall average rate increase on P&C commercial accounts held steady at +5% in June, although some industry participants have expressed concern about slowing momentum for further rate increases. The relatively mild weather and excess capital in the industry may lead to a moderation of such increases, especially if insurers can count on higher interest rates to boost investment income and take pressure off underwriting results. Competition and a flood of new capital in the reinsurance industry have already led to significant price cuts in that sector. Back in the standard lines market, MarketScout reported that the change in commercial property moved down from +6% in May to +5% in June. Multiples Move Higher. The median price/book ratio for the firms in the SNL P&C Underwriter Index ended the second quarter where it began, at about 1.0x. For L&H insurers, the potential benefits of rising interest rates led to improvement in the median price/book ratio, from 0.62x to 0.69x, the highest level observed since mid-2011. Insurance brokers continued to be viewed favorably by the market and the median MVTC/EBITDA multiple climbed from 10.5x to 10.7x at the end of the second quarter. M&A Activity Down. Consistent with trends in the general M&A market, deal activity was slower in the first half of 2013 compared to the prior year. The largest underwriter transaction of the quarter was Protective Life Corp.’s $1.1B purchase of MONY Life Insurance Co. from AXA (with an estimated price to statutory book value of 1.7x for the deal). On the broker side, two prominent deals occurred in the second quarter: Madison Dearborn’s $1.3B take-private of National Financial Partners and Brown & Brown’s $360M acquisition of Beecher Carlson. Estimated multiples of trailing twelve months adjusted EBITDA for these deals was 9.1x and 10.9x, respectively.
  2. 2. © 2013 Mercer Capital // Data provided by SNL Financial 2 SNL Insurance Broker and Underwriter IndicesSNL Insurance Underwriter Segment Indices Insurance Brokers: Median Valuation Multiples as of June 30, 2013 SNL Underwriter Indices: Median Valuation Multiples as of June 30, 2013 Mercer Capital’s Value Focus: Insurance Industry Second Quarter 2013 60.0 80.0 100.0 120.0 140.0 160.0 180.0 200.0 6/29/12 7/29/12 8/29/12 9/29/1210/29/1211/29/1212/29/12 1/29/13 2/28/13 3/31/13 4/30/13 5/31/13 June29,2012=100 SNL Insurance Underwriter Segment Indices S&P 500: 20.60% SNL Insurance Multiline: 46.50% SNL Insurance L&H: 51.51% SNL Insurance P&C: 28.59% SNL Reinsurance: 31.25% SNL Managed Care: 30.25% SNL Title Insurer: 30.41% SNL Mortgage & Finl Guaranty: 66.98% 90.0 95.0 100.0 105.0 110.0 115.0 120.0 125.0 130.0 135.0 140.0 6/29/12 7/29/12 8/29/12 9/29/1210/29/1211/29/1212/29/12 1/29/13 2/28/13 3/31/13 4/30/13 5/31/13 June29,2012=100 SNL Insurance Broker and Underwriter Indices SNL U.S. Insurance Broker: 29.41% SNL U.S. Insurance Underwriter: 35.29% S&P 500: 20.60% No. of Companies Price / LTM EPS” Price / ‘13E EPS Price / ‘14E EPS Price / Book Price / Tangible Book Dividend Yield Multiline 7 16.90 10.54 9.79 0.72 0.81 0.46% Life and Health 24 10.86 9.40 8.55 0.69 0.78 0.26% Property and Casualty 68 12.32 13.10 11.90 0.99 1.02 0.46% Reinsurance 17 7.36 9.40 9.52 0.79 0.83 0.46% Managed Care 12 12.64 11.54 10.28 1.72 2.49 0.00% Title Insurance 4 8.23 11.12 10.30 1.07 1.55 0.33% Mortgage and Fin. Guaranty 7 5.42 5.41 7.94 0.82 0.86 0.01% No. of Companies Price/ LTM EPS Price / ‘13E EPS Price / ‘14E EPS MTVC/ EBITDA MTVC/ Revenue Broker Median 5 21.45 16.50 14.79 10.74 2.53 Aon Corp. nm 19.07 13.69 12.38 10.74 2.11 Arthur J. Gallagher & Co. nm 26.70 19.86 17.34 14.07 2.53 Brown & Brown Inc. nm 23.84 21.49 18.21 12.20 4.13 Marsh & McLennan Companies nm 17.28 16.50 14.79 10.69 2.05 Willis Group Holdings Plc nm nm 14.80 13.66 (100.17) 2.70
  3. 3. © 2013 Mercer Capital // Data provided by SNL Financial 3 Recent Transactions Underwriter Return Stratification by Asset Size M&A Activity Recap: Insurance UnderwritersM&A Activity Recap: Insurance Brokers Mercer Capital’s Value Focus: Insurance Industry Second Quarter 2013 Assets < $250 MM Assets $250 - $500 MM Assets $500 MM - $1 BN Assets $1 - $2.5 BN Assets $2.5 - $10 BN Assets > $10 BN Quarter-to-Date 5.32% 7.57% 9.64% 4.26% 4.47% 9.79% Year-to-Date 26.83% 22.58% 10.14% 11.33% 18.08% 25.67% Last 12 Months 39.27% 39.60% 37.68% 29.41% 33.81% 35.31% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% AsofJune30,2013 Underwriter Return Stratification by Asset Size Q1! Q2! Q3! Q4! YTD at 6/30! 2010! 21 ! 25 ! 23 ! 37 ! 46 ! 2011! 27 ! 18 ! 34 ! 28 ! 45 ! 2012! 19 ! 28 ! 25 ! 18 ! 47 ! 2013! 20 ! 13 ! 0 ! 0 ! 33 ! 0 ! 20 ! 40 ! 60 ! NumberofTransactions! M&A Activity Recap: Insurance Underwriters! Q1! Q2! Q3! Q4! YTD at 6/30! 2010! 50 ! 45 ! 53 ! 77 ! 95 ! 2011! 77 ! 58 ! 73 ! 81 ! 135 ! 2012! 63 ! 70 ! 56 ! 132 ! 133 ! 2013! 39 ! 33 ! 0 ! 0 ! 72 ! 0 ! 20 ! 40 ! 60 ! 80 ! 100 ! 120 ! 140 ! 160 ! NumberofTransactions! M&A Activity Recap: Insurance Brokers! Largest Deals Deal Info ($M) Target LTM Financials ($000s) Deal Multiples Announce Date Total Deal Value Debt Assumed Total Assets Revenue Price / Earnings Price / Book Brokers Madison Dearborn Partners, LLC/ National Financial Partners Corp. 4/14/2013 1,283.8 n/a 899,859 1,068,976 35.68 245.16 Brown & Brown, Inc./ Beecher Carlson Holdings Inc. 5/21/2013 360.0 n/a n/a 105,600 n/a n/a Underwriters Protective Life Corporation/ MONY Life 4/10/2013 1,056.0 n/a n/a n/a n/a n/a SCOR SE/ US Life Reinsurance Business 6/3/2013 920.0 n/a n/a n/a 14.84 n/a
  4. 4. Mercer Capital Insurance Industry Services Copyright © 2013 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 • Underwriters • P&C, life & health, and managed care 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. • Reinsurance • Captives and risk retention groups • Ancillary • Third-party administrators • Claims adjusters and other service providers Contact Us Lucas M. Parris, CFA 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

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