table of contents...insurance m&a – the changing landscape insurance conference grace...

9/13/2016

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Insurance M&A – The Changing Landscape

Insurance Conference

Grace Vandecruze, CPA, MBA

September 19, 2016

Table of Contents

A. State of the Market

Regulatory Uncertainty

Equity Market Valuations

Competitive Landscape

B. M&A Transactions & Themes

C. Outlook & Predictions

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State of the Market

The year 2016 ushered in a calm after a storm of

insurance M&A deals in 2015.

The overhang of near-zero interest rates, increased regulation and low organic growth continue to weigh heavily on the industry.

Therefore, the wave of M&A is bound to return as

foreign buyers expand on the shores of the U.S. and

financial buyers sit on an abundance of capital.

This presentation examines The Changing Landscape of U.S. Insurance M&A, with a focus on P&C, Life and Health sectors.

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State of the Market

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State of the Market

Headwinds Tailwinds

Competitive Landscape

Higher Growth Rates in Emerging Markets

Strong Cash Positions/Excess Capital

Foreign Buyers

Private Equity Buyers

Prolonged Low Interest Rate Environment

Regulatory Uncertainty

Geopolitical Risk

Low Equity Market Valuations

Anemic Economic Recovery

Post-Crisis Risk Aversion

Shareholder Activism

VS.

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Prolonged Low Interest Rates-Over $3.8 Trillion of Investments

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Prolonged Low Interest Rates-Impact on the Industry

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State of the Market - Regulatory Uncertainty

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State of the Market – Low Equity ValuationsP/BV Multiples

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Price/Book

Averages 10Y 5Y 1Y CurrentU.S. L&H Insurers 1.20x 0.98x 0.97x 0.89xU.S. P&C Insurers 1.28x 1.25x 1.30x 1.30xU.S. Reinsurers 1.08x 0.94x 1.00x 0.98xU.S. Managed Care 2.03x 2.18x 2.85x 2.80x

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

SNL U.S. Insurance L&H SNL U.S. Insurance P&C SNL U.S. Reinsurance SNL U.S. Managed Care

Source: SNL Financial Database

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State of the Market – Low Equity Valuations P/E Multiples


Price/EPS

Averages 10Y 5Y 1Y CurrentU.S. L&H Insurers 12.41x 10.67x 11.50x 11.45xU.S. P&C Insurers 13.71x 14.81x 16.15x 18.67xU.S. Reinsurers 12.12x 12.02x 15.12x 20.83xU.S. Managed Care 13.34x 15.29x 21.14x 16.97x

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

SNL U.S. Insurance L&H SNL U.S. Insurance P&C SNL U.S. Reinsurance SNL U.S. Managed Care

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2005 NWP: $426.8BCapital & Surplus: $432.3B

2,757 companies


2,671 companies

State Farm 10%

AIG6%

Allstate6%

Liberty5%

Travelers4%

Farmers4%

Nationwide3%

Progressive 3%

Berkshire 3%Zurich

3%

All Others53%

State Farm10%

Allstate 5%

Berkshire5%

Liberty5%

Travelers 4%

Progressive4%

Chubb4%

Nationwide3%

Farmers 3%

AIG3%

All Others54%

Competitive Landscape – U.S. P&C Companies

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Company has an announced M&A transactionSource: SNL Financial Database


961 companies


741 companies


MetLife13% Prudential

7%

Voya5%

AEGON5%

Manulife5%AIG

5%

Hartford5%New York Life

4%Principal

3%

Lincoln National

3%

All Others45%

MetLife 9%

Northwestern6%

New York Life6%

Prudential 6%

Lincoln National4%

Mass Mutual 4%

Manulife 3%

AEGON3%

State Farm 3%

Securian 2%

All Others54%

Competitive Landscape – U.S. Life Companies

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2005 NWP: $269.8BCapital & Surplus: $ 60.4B

893 companies


1,060 companies

Company has an announced M&A transactionSource: SNL Financial Database

UnitedHealth 12%

Anthem Inc11%

Aetna7%

HlthCare Svc Corp

5%

Independence Health 3%

Humana3%

Highmark 3%

BCBS MI 3%

EmblemHealth 3%

Kaiser2%

All Others48%

UnitedHealth 10%

Anthem10%

Humana9%

HlthCare Svc Corp5%

Aetna 4%Centene

3%

Independence Health 2%

Highmark 2%

Kaiser2%

WellCare2%

All Others51%

Competitive Landscape – U.S. Health Companies

Competitive Landscape – Global Life Insurers

Americas Europe Asia

Source: Goldman Sachs Research; *Market Cap estimated at 1.5x surplus; 2014 Statista.com;

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$59.5

$40.2

$38.4

$21.1

$19.0

$13.9

$13.9

$12.6

$10.5

$10.3

AEGON

Ageas

Prudential Plc

Aviva

Metlife*

Prudential Financial*

Legal & General Group

AFLAC

Hartford

Alleanza Association

Top 10 Global Companies in 2000 by Market Cap ($ in billions) Top 10 Global Companies in 2014 by Market Cap ($ in billions)

$81.5

$66.1

$62.9

$62.6

$61.8

$59.6

$42.8

$38.1

$34.7

$33.2

China Life

AIA

Metlife

Ping An

AXA

Prudential Plc

Prudential Financial

ManuLife

China Pacific

Generali

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M&A Transactions & Themes


Small, Bolt-on Transactions

AIG/Distress Sales Transformational/Scale Focused

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Source: SNL Financial Database; 2016YTD through September 4, 2016

P/E, Specialty Focused

102 107

88

81

110 107

97

90

79 78

10

0

20

40

60

80

100

120

0

20

40

60

80

100

120

140

160

180

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

No. o

f deals

Deal value ($B)

Property & Casualty Life & Health Managed Care Multiline Total deals

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$5.0$5.5

$1.2$0.5

$17.5

$1.1

$5.5

$3.7

$13.5

$12.3

$0.20.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Deal Value ($B)

Aviva/AmerUS $2.7InvGrp/ScottishRE $0.6PL/Chase $0.9

Aegon/Merrill Lynch Life $1.3ACE/Combined Ins. $2.4

SwissRe/New CA $0.5MET/D

ELA & ALICO (AIG subs) $15.5

Fairfax/Zenith $1.4Athene/Liberty (RBC) $0.6

SCOR/Trans. RE $0.9Harbinger/Old Mutual $0.4Guggenheim/EquiTrust $0.4

DE Life/US Annuity $1.4PRU/Hartford Life $0.6Athene/Aviva $1.5Athene/Presidential $0.4

PL/MONY $1.0SCOR/Generali’s US $0.9GAFG/Forethought $0.7Resolution/Lincoln $0.6

CPPI/Wilton Re $1.8GreyCastle/SAC $0.7CPPI/TransAm $0.5Manulife/Std Life $4.0

Dai‐ich

Life/PL $5.6

$5.0

Meiji/Stancorp

$5.0

Sumitomo/Symetra $3.7

Life Insurance M&A

Strategic transactions are noted in blue; Financial transactions are noted in redSource: SNL Financial Database; 2016YTD through September 4, 2016

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$4.6

$11.6

$15.9

$6.4 $7.4 $6.8

$2.0$4.6

$7.8

$53.0

$1.1

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Deal Value ($B)

Catlin/Wellington $1.1QBE/Preatoria $0.8

Liberty/OH Casualty $2.7Mapre/Com. $2.3QBE/WintherthurUS $1.2Munich Re/Midland $1.3

Zurich/21st Century $1.9Farmers/AIG auto $1.9Validus/IPC $1.7Fairfax/Odyssey Re. $1.0

ACE/Rain&Hail $1.0Fairfax/Zenith $1.3

Alleghany/Transatlantic $3.5Allstate/White Mt $1.0Nationwide/Harleysville $0.8QBE/Balboa $0.7

Travelers/Dom. of Canada $1.1Dupperreault Grp/SAC Re $0.6American Family/Homesite. $0.6Enstar&Stone Pt/Torus $0.7

Liberty/Safeco $6.2Tokio Marine/ PA Con. $4.7

Exor/PartnerRe $6.6Fosun/Ironshore $2.1CM/Sirius $2.2Endurance/Montpelier $1.4

Validus/Western World $0.7TPG/Waranty Gp $1.2Wright Ins/B&B $0.6

ACE/Chubb $28.4

$7.4

Tokio

Marine/HCC

$7.4

P&C Insurance M&A

Strategic transactions are noted in blue; Financial transactions are noted in redSource: SNL Financial Database; 2016YTD through September 4, 2016

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Selected M&A Transactions


M&A Transactions & ThemesPrivate Equity Buyers in M&A Transactions

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Private Equity backed M&A Deals

Source: SNL Financial Database; 2016YTD through September 4, 2016

10%

8%

5%

8%

14%

3%

16%

27% 28%

4%

1%

0%

5%

10%

15%

20%

25%

30%

‐

1.0

2.0

3.0

4.0

5.0

6.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

% of P&C, M

anaged Care and L&H deals to total PE deals

Deal Value ($B)

Property & Casualty Managed Care Life & Health PE deals %

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Private Equity

Dominates

Increasein

Cross‐BorderTransactions

Niche Focused/Specialty

Acquisitions

Significant dry powder with PE firms will propel M&A forward

Could serve as a catalyst for higher premiums

Clarification of regulatory rules for PE buyers viewed as a positive

Overseas players interested in establishing U.S. beachhead in niche businesses

Strong interest in foreign buyers seeking entry into the U.S.

Retrenchment from U.S. by European insurers due to Solvency II requirements

Chasing GDP growth by North American/European insurers in Asia/Latin America

Focus on accretive use of capital/blot-on acquisitions to offset lack of organic growth prospects and unattractive pricing dynamics in many sectors

Commoditized franchises are cautiously looking for differential niche acquisitions

Renewed focus on core competencies by shedding peripheral businesses


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Limited number of

Large Strategic Deals

Low Valuation/ Regulatory Uncertainty

“Cashis

King”

The largest strategic deals in the last 10 years were an AIG-related transaction (Met/ ALICO-$15.5B) and ACE/Chubb-$28.2B

Regulatory concerns over non-bank SIFI will limit large, strategic transactions among the top life insurers

Low valuations with little catalyst for stock price performances remain a significant obstacle to consolidation – even in overcrowded, highly-fragmented sectors

Continued regulatory overhang as industry deals with the explosion of regulatory requirements and authorities

Cash will continue to be the currency of choice, driven by significantly improved balance sheets with excess capital

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Outlook & Predictions

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Market Segmentation / More Focused Business Models

Focus of major players on being either one of globalization, domestic

dominance or regional / niche markets

Continued rationalization of non-core / subscale businesses

Regulatory Uncertainty will persist

Convergence of global solvency standards

What role will the U.S. regulatory position play?

The Fed’s influence over the insurance industry will continue

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Foreign Buyers and Private Equity Firms will continue to dominate

Capital Management

Recalibration of ROE targets

Continued regulatory and rating pressures

Interest rates continue to stay low or even go negative

Investment in Growth Market

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In the aftermath of the financial crisis,

the character of Insurance M&A has changed

from small, bolt-on transactions to large, transformational deals.

The industry is in the midst of transition

while regulatory capital rules are being redefined.

Expect a wave of strategic transactions

along with cross-border and private equity deals

to continue.

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Closing Remarks

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Thank youContact InformationGrace VandecruzeManaging DirectorGrace Global Capital LLC477 Madison Avenue, 6th FloorNew York, NY 10022 Phone: [email protected]

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Grace Vandecruze is the Founder and Managing Director of Grace Global Capital LLC, a consulting firmproviding financial advisory, restructuring, valuation and capital-raising services to insurance regulators andcompanies since 2007. She advised the Attorney General in Delaware on the Highmark affiliation with BlueCross Blue Shield of Delaware. In addition, she has served as financial advisor to Insurance Commissioners inseveral states including New Jersey, Indiana, Maryland and North Carolina. She was a Managing Director atSwiss Re and was responsible for the firm's regulatory advisory practice in the insurance and financial servicesindustries. She has extensive expertise in mergers and acquisitions and capital raisings, and most notably sheprovided expert testimony on the valuation of Conseco during the largest bankruptcy in the insurance industry.Prior to joining Swiss Re, she was a Vice President at a private equity firm specializing in the insurance industryand an Associate in the Financial Institutions Group at Merrill Lynch. She earned an MBA in Finance from TheWharton School at the University of Pennsylvania in 1994 and a BBA in Accounting from Pace University in1985. Before attending The Wharton School, she was an auditor for six years at Ernst & Young and GrantThornton. She is a Certified Public Accountant. She is also a licensed sailor and has participated in severalmountain treks to Bhutan, Annapurna, Kilimanjaro and Everest Base Camp.

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