The specialty lines insurance industry has been a hotbed of merger-and-acquisition activity over the past year, with deals for niche specialty brokers and managing general agents getting the most attention.
As more deal announcements emerge in the coming months, will specialty insurance deals continue to take center stage?
You decide. On the following pages are what dealmakers and consultants had to say about recent past deals in the specialty lines segment. Click "next" to begin the slideshow.
Jerry Theodorou
Vice President of Insurance Research & Publications; Conning
"M&A is typically a creature of the soft market. When you can't grow your way out of the doldrums, you try to buy somebody else," says Jerry Theodorou, vice president of insurance research & publications for Conning in Hartford, Conn.
Theodorou, analyzing the latest wave of deals, identifies a trend toward strategic buys of specialty-flavored books by carriers—especially distribution plays, in Conning's 20th annual report on insurance M&A trends (Global Insurance Mergers & Acquisitions in 2010, Moving From Defense to Offense).
Neill Currie
Chief Executive Officer; RenaissanceRe
"For the last few years, it might have been a little confusing for investors who were wondering what RenRe was doing writing admitted insurance business in the United States," says Neill Currie, CEO, RenaissanceRe Holdings, explaining a March deal to sell RenRe's specialty admitted insurance operations to QBE.
We continue to have one of the higher multiples of market price-to-book value, and part of the reason for that is that the investor understands what we do," Currie says.
Scott Carmilani
Chair, President, and CEO; Alllied World Assurance
"By combining forces, we get everything a global insurer and reinsurer needs for a marketplace that is evolving in a dynamic way—scale, size, diversity and capital flexibility," says Scott Carmilani, chair, president, and CEO of Allied World Assurance Company Holdings, describing a proposed merger deal a $3.2 billion merger deal combining the specialty insurer with Transatlantic Holdings, a specialty reinsurer in July.
"Even where it might look like the two merged entities are focused on the in same business, they are not," adds Carmilani, explaining that the franchises are complementary in areas like medical malpractice. Transatlantic focuses on physicians liability with treaty reinsurance, while Allied World provides insurance for hospitals and other facilities.
(Another suitor, Validus Holdings has entered the contest for Transatlantic recently.)
Doug Libby
Chief Executive Officer; Crum & Forster
"There is a history of admitted companies taking over nonadmitted companies and damaging the entrepreneurial culture," says Crum & Forster CEO Doug Libby.
Libby says that is not about to happen with C&F's recent $294 million deal for First Mercury Financial Corp. First Mercury's excess-and-surplus lines businesses gel perfectly with the "out-of-the-box" underwriting culture ingrained in C&F's admitted specialty operations, he says, adding that the day-to-day operations of the rebranded E&S business now known as CoverXSpecialty E&S group will continue to be managed by Ted Camp, First Mercury's executive vice president and chief underwriting officer.
Chris Hughes
Director of Insurance Distribution; Merger & Acquisition Services
"Valuations for some niche deals are being bid up to levels like 6- to 8-times EBITDA," says Chris Hughes, director of insurance distribution for Merger & Acquisition Services in Hartford, referring to earnings before interest, taxes, depreciation and amortization.
Hughes says large program managers looking for niche product lines to plug into their vast retail distribution networks are among the buyers pushing prices up.
Richard Kahlbaugh
Chief Executive Officer; Fortegra Financial
"It wouldn't be a stretch to say that wholesaler-deal prices are up 10-25 percent" since 2009, according to Richard Kahlbaugh, CEO of Jacksonsville, Fla.-based Fortegra Financial.
Kahlbaugh, whose firm acquired wholesaler Bliss & Glennon from Willis in 2009, contends that Ryan Specialty Group—the most active acquirer in the wholesale space, which is headed by Patrick Ryan, the former chair on Aon—"has inflated expectations" on pricing.
Jason Murgio
Principal; Merger & Acquisition Services
"There are plenty of buyers out there, but there are not a lot of sellers at the current price metrics," says Jason Murgio, a principal for M&A Services, explaining a lower level of carrier deals compared to distribution deals in the specialty insurance market.
Given soft market conditions, "it had been harder for carriers to find an acquisition opportunity where the price makes sense from the seller's standpoint," Murgio explains.
Robert Deutsch
Managing Director; GCP Capital Partners
"On the underwriting side, there is no reason for so many insurance companies to exist and, intellectually, many should be merged," says Robert Deutsch, a managing director for GCP Capital Partners, a New York-based private equity firm.
Why aren't more insurers consolidating?
Problems are seller expectations, using depressed stock values as a currency, social issues and reserve valuations, among other factors, Deutsch says.
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