Strategic Buyers Reemerge In

"That slowed down," agreed Bob Kimmel, an executive vice president at Collins in San Francisco. "They are in a credit crunch," said Mr. Kimmel, who leads the Programs Practice Group at Collins, a reinsurance intermediary and insurance services firm headquartered in Minneapolis.

The advisers noted, however, that there are other buyers eagerly looking to make deals for program managers this year, including insurance companies seeking to fatten their top lines during a soft market.

The change in buyer profiles is "primarily driven by carriers seeing zero growth in net written premium," said Hales' Mr. Lieblein, who is the author of the "2008 Industry Sourcebook for Mergers and Acquisitions." (The Sourcebook is published by The National Underwriter Company.)

Flat net written premium reports are working against "pressure to grow" for companies. In that situation, he said firms are "looking at programs" and telling themselves they can acquire those books of business and provide the coverage themselves. "Otherwise, dollars are just being shifted between carriers," making it very difficult for carriers to grow, he said.

Mr. Kimmel highlighted differences in acquisition drivers for insurance companies and for private equity firms. Where PE firms looked at the deals in financial terms–namely, the program company's value–instead, insurers are shopping as what he called "strategic buyers," looking to find new areas of specialty insurance business.

The interest from strategic buyers has been "very broad," he said, as companies are also looking to diversify. As an example, he pointed to the Bermuda-based firms that have formed in recent years to write catastrophe reinsurance, which are now looking to expand their horizons as that market starts to soften somewhat.

With that in mind, Mr. Lieblein said companies are looking to acquire program businesses that have staked out "their own piece of the market, no matter how specific that piece may be."

Better-run businesses are obviously better acquisition targets, according to Mr. Lieblein, pointing to the need for the program businesses to be profitable and well run to attract buyer interest.

A strong niche program also offers something more "to the extent that you create something that is hard to replicate," Mr. Lieblein added. Specifically, he noted that seeking out a well-run niche program involves getting the talent at the company as well. "You can't go out and get it elsewhere," he said.

Mr. Kimmel said that niches–such as crop insurance and workers' compensation–have become attractive targets for buyers in the specialty markets.

The appeal of workers' comp, he said, can be seen in several deals that have occurred over the past two years–such as the acquisition of U.S. Specialty (a Cleveland, Ohio-based excess workers' comp writer) by Meadowbrook of Southfield, Mich., or Omaha, Neb.-based Berkshire-Hathaway's acquisition of two California-based MGAs writing workers' comp.

An area such as crop insurance, he added, may seem to be an attractive opportunity to buyers given the major attention to environmental issues and the potential for ethanol and other biofuels.

Mr. Kimmel said the quality of the program business is a key factor in the pricing of an acquisition. "Pricing is driven by the inherent profitability," he said. He added, however, that a soft market "will create margin pressure" that will also spur companies to acquire more businesses.

In terms of pricing, Mr. Lieblein said the M&A market is being driven by supply and demand, adding "there's not that great a supply" of program business that would be truly attractive for carriers and other buyers.

He doesn't see activity slowing down in the near future either, he said, reasoning, "I don't see any change in the market."

The market forces driving carriers to look at program acquisitions, he said, don't appear to be changing significantly any time soon, and as a result, "this will continue" as long as current conditions do.

Michael Arledge, president of commercial specialty for Argonaut Select Markets, a division of Bermuda-based Argo Group, offered a strategic buyer's perspective on the financial benefits that a program acquisition can provide in terms of competition and resource allocation given the current economic landscape.

"Acquisitions become even more important in the declining rate environment in which we find ourselves," he said. "By making acquisitions, we lessen the need to compete on an account-by-account basis. We also can deploy our resources more productively through bringing in books of business that already have demonstrated margins."

For buyers, acquiring a new program business may mean opening up to a whole new line in some cases, or in others, building on a business they already engage in–as was the case when Argo Group announced its purchase of Massamont Insurance Agency, an MGA specializing in public entity coverage, in early March.

In a statement, Argo said it was looking to expand the footprint of its own public entity insurer, Trident Insurance Services.

"The Massamont acquisition is a clear indication of Argo's intent to achieve or sustain leadership within its various specialty practices," Mr. Arledge told National Underwriter. "Massamont enjoys a dominant market position in New England with its public entity property-casualty practice."

The integration of Massamont with Argo's public entity practice "makes the new combined entity a leader in the commercial insurance arena for this specialty, and sets the stage for continued profitable growth," said Mr. Arledge.

But while moving into new markets is always attractive, the Massamont deal also allowed the Argo Group to expand its own knowledge base. In addition to providing a gateway into the markets in New England, Mr. Arledge said the Massamont acquisition "brings additional leadership to Argo and deepens our core underwriting, claims and loss control expertise."

While many mergers and acquisitions are analyzed based on their financials–the top or bottom lines–bringing a new acquisition and its personnel on board is much more of a process than simply taking on a book of business or finding new office space.

Mr. Arledge said the issue of corporate culture is a major factor in potential acquisitions for the Argo Group, and one that can be decisive in determining whether to go forward with a proposed deal.

"The number-one characteristic we look for is a mutually compatible culture that is already in alignment with our vision and values," he said. "Without that being a 100 percent match, we really don't need to go much further."

In the case of Massamont, he said the two companies appeared from the beginning as a perfect fit culturally, while allowing Argonaut the opportunity to expand into the New England markets.

"It's remarkable that both operations, though miles apart, have the same level of commitment to specialization and focus on client needs, and strive to provide a total solution for the end users," he said. "At the same time all of these similarities were determined, it became an extremely good fit from a geographic perspective."

Trying to assess whether a potential acquisition or merger will mesh with your own corporate culture can be "an interesting process," Mr. Arledge noted. But it is one he said Argo must undertake before entering into negotiations–and one he believes is important to other companies as well, noting that it can help set a more positive tone as the negotiations move forward.

"Surprisingly enough, whether you are on the acquiring, or being acquired side, both parties to the transaction know they really want to make this match," he said. "This makes any transaction more of collaboration than a negotiation."