Private equity to target brokers

A report suggests that private equity might be interested in acquiring insurers now, while their book value is low, with the objective of cleaning them up for a sale when their value increases down the road. This is in addition to their ongoing interest in buying up brokerages…..

 

Private equity (PE) firms are likely to continue targeting mergers and acquisitions (M&A) deals with insurance brokers in 2013, according to a report on market trends report by Deloitte.
 
“The insurance industry is becoming a favoured investment focus for several PE firms as well as industry/strategic buyers,” Deloitte says. “In general PE firms have been more focussed on insurance brokers than traditional insurance underwriting for M&A. The traditional market is risk- and balance-sheet intensive and, therefore, it can be hard for PE firms to leverage their investment.”
 
Brokerages, on the other hand, represent “a good avenue to achieve a steady cash flow.”
 
Deloitte observed that M&A activity was down in 2012, and that many traditional underwriting companies in the insurance industry are trading below historical book values. 
 
Life and health insurers, which are trying to sell off their volatile variable annuity businesses, were trading at a paltry price-to- book-value of 0.81 in 2012, compared to 1.46 in 2002.
 
Property and casualty insurers sported a price-to-book-value of 1.12 in 2012, down from 1.74 in 2002.
 
Canadian insurance brokerages, by contrast, were selling at multiples of 1.5 times net commissions about a decade ago, a multiple that has shot up to more like 2.75 currently, according to David Crozier, a principal of .bcc consulting. (continued)#pb#
 
Stagnant or low growth in the insurance market makes it seem likely that insurance companies will target the acquisition of brokerages rather than introduce new products going forward, Deloitte suggests. “Many companies are anticipated to focus on acquiring new or expanded distribution channel versus products, to better differentiate themselves in an increasingly homogenized marketplace.”
 
In turn, PE firms seem more likely to go after insurance companies in the future. The combination of depressed book values now, plus the predicted improvement in economic conditions – which would increase an insurer’s volume of business – might present a perfect opportunity to buy low and sell high.
 
“The industry is in the beginnings of a general rebound,” Deloitte said. “Volume, pricing power, and economic activity are moving in the right direction, which can offer a good entry point for a financial investor that is looking to buy an insurance company or selected assets at a low price, aggressively manage and clean up the business, and quickly sell it to reap appropriate rewards.”

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