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685 Third Avenue New York, New York 10017 (212) 497-4100 www.hlhz.com Los Angeles New York Chicago San Francisco Washington D.C. Minneapolis Dallas Atlanta.

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Presentation on theme: "685 Third Avenue New York, New York 10017 (212) 497-4100 www.hlhz.com Los Angeles New York Chicago San Francisco Washington D.C. Minneapolis Dallas Atlanta."— Presentation transcript:

1 685 Third Avenue New York, New York (212) Los Angeles New York Chicago San Francisco Washington D.C. Minneapolis Dallas Atlanta London H O U L I H A N L O K E Y H O W A R D & Z U K I N Mergers & Acquisitions in the Property/Casualty Insurance Market Casualty Actuaries of Greater New York Spring 2004 Meeting June 3, 2004

2 2 Agenda – Property & Casualty Insurance Industry Fundamentals Historical M&A Trends Recent M&A Trends M&A Outlook

3 3 Overview P&C consolidation has declined markedly and relatively steadily over the past five years Transformational deals are out of favor –St. Paul / Travelers is the exception, not the rule Going forward, P&C acquisition activity should increase as rates soften and organic growth is more challenging –However, M&A activity will be more thoughtful, as quality insurers consolidate and diversify with smaller niche acquisitions

4 Industry Fundamentals

5 5 Story of 2000 – 2004 The Race Between Premium Prices and Development

6 6 Decelerating Hard Market Property & Casualty companies enjoyed an extended run of rate increases beginning in 2000 Overall rates have begun to fall back to the levels last seen in late 1999, the end of the last soft market cycle –Increases began to decelerate in 2003 –Property has softened (large account) –D&O and Med Mal still rising Question is whether the casualty lines have caught up after years of under-reserving

7 7 Decelerating Hard Market -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Fall 98Spring 99Fall 99Spring 00Fall 00Spring 01Fall 01Spring 02Fall 02Spring 03 Personal AutoHomeownersCommercial Lines Fall 03 Average Commercial and Personal Lines Rate Changes

8 8 Adverse Reserve Development The rating agencies are skeptical of the capital position of many insurers –Fitch estimates the reserving shortfall to be $77 billion Asbestos – no trust fund and no end in sight M&A Impact: Given the magnitude of the downside, prudence has dictated caution among would-be acquirors given sellers’ natural information advantage

9 9 Capital Turning the Corner The tragedy of September 11th, adverse loss development and the equity markets devastated the P&C sector’s surplus Thanks to the hard market, the industry is now generating a torrent of cash flow and surplus has surpassed 1999 levels, assuming proper reserving 22%

10 10 Capital Management What to do with the build up of surplus? Increase Dividends –With the new tax laws, dividending is an attractive option –Montpelier Re increased its dividend yield to nearly 4% in 2003 Growth through Acquisitions –Buyers may be able to take advantage of smaller insurers which have been weakened by capital pressures and rating agency actions –Many of the Bermuda players have picked off liability-free business from weakened peers

11 Historical M&A Trends

12 12 M&A Drivers M&A Driver P&C Insurance Applicability Technological Change Financial Markets Management/Personality Regulatory / Political Focus / Diversification

13 13 Fragmented P&C Insurance Market

14 14 Deal Volume – Relatively Cyclical Not surprisingly, P&C insurance M&A deal volume is reasonably cyclical

15 15 P&C M&A Activity Generally, deal volume is inversely correlated with P&C rates P&C rates

16 16 Valuations and the Cycle The interplay between interest rates and P&C rates impacts P&C company valuations as well as deal volume Asbestos; Product Liab. Hurricane Andrew 9/11 P&C rates

17 Recent M&A Trends

18 18 Is Hank right? “…[T]wo drunks helping one another home…” - Hank Greenberg on P&C acquisitions

19 19 Recent M&A Activity: A Look Back Large transactions on the decline –Bifurcation – strong grow and weak pare back or run-off –Renewal rights deals flourish as buyers have the upper hand Bermuda Class of 2001 –Filling the capacity shortfall –Cash flowing and surplus spiking… Focus and rationalization –Pendulum swings away from diversification –Sponsored spin-offs rise in popularity

20 20 The Death of the Mega-Deal? There have been 44 P&C mergers valued at $500 million or more since 1997 but all but five occurred in the 1997 – 2001 period Source: SNL DataSource

21 21 Deal Valuations Decline Median multiples have declined drastically over the last few years but may be on the rise again

22 22 The Rise of Renewal Rights Transactions Renewal rights deals have become increasingly popular given market skepticism regarding the adequacy of reserves Competition for growth in soft cycle should cause a decline in renewal rights deals

23 23 Bermuda: Consolidation? Newer Bermuda players focused on secondary offerings, providing original venture investors a chance to reduce positions To date in 2004, a total of 15 insurance offerings have priced, raising $4.9 billion with selling shareholders receiving 77% of those proceeds. Starting in 2005, the Bermuda players will contend with slowing growth Some of the Bermuda insurers have already begun to participate on the M&A front by purchasing the renewal rights of weaker competitors

24 24 Past as Prelude: Bermuda Class of 1993 Source: A.M. Best, Bermudan Business, Aon Capital Markets 4,000 3,500 3,000 2,500 2,000 1,500 1, Cumulative Capital Raised ($mm) IPO StageM&A Stage Partner Re. Ltd. IPO Nov Global Capital Reinsurance Ltd. Sold to Exel Ltd. Jun Global Capital Reinsurance Ltd. IPO Dec LaSalle Re. Ltd. IPO Nov LaSalle Re Merged with Trenwick Oct Centre Cat Ltd. Sold to Ace Ltd. Apr Tempest Reinsurance Co. Sold to Ace Ltd. Jul IPC Holdings Ltd. IPO Mar RenaissanceRe Holdings Ltd. IPO Jul Mid Ocean Ltd. IPO Aug Mid Ocean Ltd. Sold to Exel Ltd Companies that went public and later were acquired Companies that went public and expanded beyond their original mandate Companies that remained private until acquired

25 25 Rationalization Verdict: focus is the safe bet –Management is heeding the Street and divesting –Examples: Safeco, CNA, RSA and Zurich Contra-case –Diversification: risky but necessary?

26 26 Divestiture Mechanism: The Spinoff As profitability and competition have become increasingly challenging, many insurers are focusing on core markets In addition to divestitures, insurers have taken advantage of the capital markets by spinning off more profitable businesses

27 M&A Outlook

28 28 Outlook Soft Cycle  Spurs M&A activity –Bermuda consolidates again… –Diversification returns? –New hybrid capital – prolonging the inevitable? Russian Roulette Returns? –Sellers gain leverage and liabilities back on the table Specialty consolidation and the return of the roll-up –WC, E&S and NSA Focus on expenses in downturn –Outsourcing? Europeans bargain shoppers –Weak dollar could tempt buyers


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