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Insurance M&AOverview and PerspectiveSIFM ConferenceNew YorkDoug Sweeney, Managing Director Fahad Khan, Senior ManagerDeloitte Transactions and Business Analytics LLPJune 19, 2019

Insurance M&A Overview and PerspectiveCopyright © 2019 Deloitte Development LLC. All rights reserved. 2

Agenda

Introductions

Market data 3

Outlook 8

Understanding the M&A lifecycle 11

Integrated team of internal and external resources 12

Diligence: overview 13

Pre-deal valuation – overview 14

Synergies in M&A – representative examples 15

Impact on buyers’ financials – Purchase Generally Accepted Accounting Principles (PGAAP) representative example 16

PGAAP from a market perspective – P&C example 17

Biographies 18


Market data


P&C M&A activity

Sources: SNL Market Intelligence Platform, SNL U.S. Insurance – P&C indexNote:2018 and 2019 year-to-date (YTD) details based on data as of May 31st

Year 2014 2015 2016 2017 2018 2019 Year 2014 2015 2016 2017 2018 2019

Size of Deals ($M) SNL U.S. Insurance - P&CLow 1.3 0.3 0.3 1.4 1.8 5.3 Average P/BV 1.29x 1.32x 1.29x 1.43x 1.50x 1.54xHigh 1,671.3 28,240.3 6,303.8 1,906.2 15,388.0 1,050.0 Average ROAE 10.4% 9.7% 8.8% 9.9% 5.5%Average 199.4 1,636.1 408.8 372.2 1,137.8 291.6

Observed P/BV Deal Multiples Observed P/BV Deal MultiplesLow 0.14x 0.99x 0.21x 1.50x 0.50x 1.15x Average P/BV 1.50x 1.48x 1.19x 2.08x 1.35x 2.01xHigh 2.83x 2.53x 1.45x 2.88x 4.07x 2.87xAverage 1.50x 1.48x 1.19x 2.08x 1.35x 2.01xMedian 1.43x 1.29x 1.14x 1.97x 1.53x 2.01x

Number of Deals 65 51 70 53 61 13

Property and Casualty TransactionsPrice to Book Value Multiples and Aggregate Deal Value

Property and Casualty TransactionsTransaction Price to Book Value Multiples and SNL P&C Market Price to Book Multiples

0.00

0.50

1.00

1.50

2.00

2.50

0

10,000

20,000

30,000

40,000

50,000

60,000

2014 2015 2016 2017 2018 2019

Average P/BV (x)

Aggr

egat

e D

eal V

alue

($M

)

Aggregate Deal Value ($M) Average P/BV

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0.00

0.50

1.00

1.50

2.00

2.50

2014 2015 2016 2017 2018 2019

Aver

age

ROAE

Aver

age

P/BV

(x)

Average P/BV Observed P/BV Deal Multiples Average ROAE

YT

D D

eal Valu

e

YTD30 Deals


L&H M&A activity

Sources: SNL Market Intelligence Platform, SNL U.S. Insurance – L&H index, CapIQNote:Information for 2019 transactions is limited/not disclosed, and therefore not presented

Year 2014 2015 2016 2017 2018 Year 2014 2015 2016 2017 2018

Size of Deals ($M) SNL U.S. Insurance - L&HLow 3.0 1.5 6.8 0.0 0.3 Average P/BV 1.11x 1.04x 0.93x 1.15x 1.10xHigh 5,579.6 5,001.9 2,750.8 1,835.2 3,269.0 Average ROAE 9.4% 10.0% 7.7% 13.5% 10.2%Average 544.5 698.8 290.7 505.3 614.0

Observed P/BV Deal Multiples Observed P/BV Deal MultiplesLow 1.29x 0.10x 0.18x 0.64x 0.39x Average P/BV 1.29x 1.40x 2.58x 0.99x 1.21xHigh 1.29x 2.17x 4.97x 1.28x 1.21xAverage 1.29x 1.40x 2.58x 0.99x 1.21xMedian 1.29x 1.13x 2.58x 0.96x 0.80x

Number of Deals 17 28 27 31 26 10-year Treasury 2.2% 2.3% 2.5% 2.4% 2.7%

Life and Health TransactionsTransaction Price to Book Value Multiples and SNL L&H Market Price to Book Multiples

Life and Health TransactionsPrice to Book Value Multiples and Aggregate Deal Value

0.00

0.50

1.00

1.50

2.00

2.50

3.00

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2014 2015 2016 2017 2018

Average P/BV (x)

Aggr

egat

e D

eal V

alue

($M

)

Aggregate Deal Value ($M) Average P/BV

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2014 2015 2016 2017 2018

Inte

rest

Rat

es/A

vera

ge R

OAE

Aver

age

P/BV

(x)

Average P/BV Observed P/BV Deal Multiples 10-year Treasury Average ROAE


Brokers M&A activity

Sources: SNL Market Intelligence Platform

Year 2014 2015 2016 2017 2018 2019

Number of Deals 351 492 457 537 594 231

Insurance Broker TransactionsAggregate Deal Value and Number of Deals

0

100

200

300

400

500

600

700

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2014 2015 2016 2017 2018 2019

Num

ber o

f Dea

ls

Aggr

egat

e D

eal V

alue

($M

)

Aggregate Deal Value ($M) Number of Deals


Trends on M&A

Historical M&A Trends

• Over the past five years

− The transaction P/BV multiple was around or above the market P/BV for the P&C sector; approximately 88 percent buyers are in US or Bermuda

− The transaction P/BV multiple was around the market P/BV for the L&H sector, excluding 2016 and 2019 where disclosed P/BV multiples were very limited; approximately 87 percent buyers are in US or Bermuda

− 96 percent of the buyers in insurance broker deals are in US or Bermuda

• Significant deceleration YTD in P&C and L&H transactions compared to 2018

− P&C volume down 60 percent, L&H down 40 percent

− P&C aggregate deal values down 94 percent, L&H aggregate deal values down 96 percent*

• In the P&C sector, YTD there was one transaction announced greater than $1 billion. In comparison, for the same period in 2018 there were five, with three greater than $3 billion

• In L&H sector, there appeared to be one transaction rumored to be greater than $1 billion; however, the official deal value has not been disclosed. Even considering this rumor, YTD aggregate deal value would be 65 percent off from prior year

*Aggregate deal value for 2019 is limited to the availability of disclosed transaction data

General Themes

• Search for specialty lines of business

• Disposal of non core assets

• Buyers expanding on their niche/selected segments to build scale

• Acquisition of small/regional brokers driving broker activity

− PE-backed brokers have driven consolidation in the sector

• Influx of foreign buyers


Outlook


M&A drivers in 2019 H1

Commentary Impact on M&A Activity

Rates Hardening

• Rates firming in P&C sector and reinsurance may have led to a focus on organic growth negatively impacting M&A activity

Interest Rate

• 10-year treasury rates dropped 60 basis points during the first five months of 2019. Periods of low rates may prompt companies to consider M&A for growth; however, the M&A activity in L&H sector had an unexpected slow down in 2019 H1

Misalignment between Buyers and Sellers

• There appears to be a lack of alignment between sellers and buyers in the current environment:‒ Target asks are based on premiums, above traded prices, observed in

2018 when organic growth opportunities were limited‒ Thomas Gayner, co-CEO Markel stated that he has not made potential

M&A calls because “prices are too high”‒ The increased market volatility appears to have added a degree of

uncertainty to the market price of both buyers and sellers

Sources: SNL Financial, Factiva. Deloitte Research“2019 Insurance M&A outlook – Positioning for growth”, Deloitte “Average year for insurance carrier M&A remains achievable , if less likely”, Tim Zawacki, May 22, 2019, https://platform.mi.spglobal.com/web/client?auth=inherit#news/article?KeyProductLinkType=2&id=51772740“Top-line sluggishness evident in Q1 US P&C insurance statutory financials”, Tim Zawacki, May 21 2019https://platform.mi.spglobal.com/web/client?auth=inherit#news/article?id=51923910&KeyProductLinkType=6

https://platform.mi.spglobal.com/web/client?auth=inherit#news/article?KeyProductLinkType=2&id=51772740

https://platform.mi.spglobal.com/web/client?auth=inherit#news/article?id=51923910&KeyProductLinkType=6


Outlook for 2019 H2

Sources: SNL Financial, Factiva, Equity Research Reports“Average year for insurance carrier M&A remains achievable , if less likely”, Tim Zawacki, May 22, 2019, https://platform.mi.spglobal.com/web/client?auth=inherit#news/article?KeyProductLinkType=2&id=51772740“Top-line sluggishness evident in Q1 US P&C insurance statutory financials”, Tim Zawacki, May 21 2019https://platform.mi.spglobal.com/web/client?auth=inherit#news/article?id=51923910&KeyProductLinkType=6“No slowdown in sight for broker M&A activity” May 27, 2019 Adam Klauber, William BlairInsurance Agency Link Directory http://www.insuranceagencylinkdirectory.com/“Alternatives in 2019: Private Capital Dry Powder Reaches $2tn” Naomi Feliz, January 28, 2019 https://www.preqin.com/insights/blogs/alternatives-in-2019-private-capital-dry-powder-reaches-2tn/25289“Global Reinsurers See Promising Green Shoots in 2019 with ‘Hardening’ Pricing: S&P” June 5 2019. https://www.insurancejournal.com/news/international/2019/06/05/528442.htm

We expect an up-tick in M&A activity in the second part of 2019 in both the P&C and L&H sectors.

Commentary Impact on M&A Activity

Lack of Organic Growth

• The hardening of the P&C rates did not translate into observable premium growth in Q1 2019 based on company’s filings. Additionally based on those filings the overall combined ratios in P&C increased slightly

Regulatory Changes

• FASB Long Duration Targeted Improvements implementation may incentivize firms to divest the volatile businesses

Other Factors

• There appears to be an active inventory of properties on the market –several companies have messaged the intent to sell books of business/legal entities

• Private equity companies have significant “dry powder” • The Fed has messaged that it plans to hold interest rates stable for rest of

2019; this may prompt L&H companies to consider M&A to drive growth• Companies that made significant acquisitions in 2017 and 2018:‒ May consider divesting certain books of business as they right-size their

balance sheet‒ May consider additional transactions to continue to drive growth after

integration

https://platform.mi.spglobal.com/web/client?auth=inherit#news/article?KeyProductLinkType=2&id=51772740

https://platform.mi.spglobal.com/web/client?auth=inherit#news/article?id=51923910&KeyProductLinkType=6

http://www.insuranceagencylinkdirectory.com/

https://www.preqin.com/insights/blogs/alternatives-in-2019-private-capital-dry-powder-reaches-2tn/25289

https://www.insurancejournal.com/news/international/2019/06/05/528442.htm


Understanding the M&A lifecycle

Transaction Execution

Board or Steering Committee approval

Completed letter of intent

Term sheet

Executed purchase

agreement

Transfer of ownership/closing documentation

Integration

Implementation Planning

DefinitiveDiligence

Negotiation of Final

Transaction

MergerStrategy

Development

TargetScreening and Identification

PreliminaryDiligence

Synergy and Value Driver Quantification

Negotiationof Letter of Intent

Implementation and Transaction

Closing Preparation

Closing & Execution of Implementation

Plan

Target Screening

Diligence

Strategy

M&A Strategy & Target Screening

Project Management Office and Diligence Transaction Execution Integration

• Develop plan for overall corporate business unit portfolio

• Determine and develop internal M&A capability

• Develop long-term M&A goals and objectives

• Develop screening criteria; requisites for strategy

• Collect screening data to evaluate potential Targets

• Identify initial acquisition candidates

• Conduct detailed screening of potential Targets based upon business strategy, competitive strategy, and value potential

• Determine diligence protocols and metrics

• Identify synergy targets• Perform commercial, actuarial,

accounting, tax, operational, HR, valuation and IT diligence

• Assess potential fit of merging companies (financial, strategic, legal, cultural, etc.)

• Assess potential risks to synergy targets and develop mitigation strategies

• Develop valuation of proposed deal

• Determine deal structure to align with synergy targets and strategic considerations

• Formulate purchase price adjustment mechanism

• Analyze synergies and Target valuation in terms of proposed deal structure

• Conduct M&A negotiations and deal close

• Develop Opening Financials which will include impact of PGAAP

• Day One readiness and begin integration planning

• Day One and post-merger planning and management

• Synergy identification, capture, and tracking

• Integration execution assistance• Legal entity design and readiness• Organizational design and

implementation including change management

• Integration planning and execution• Accounting standards conversion

(i.e., IFRS to GAAP)• Regulatory approval assistance• Provide continued assistance on tax

structure, filings, and compliance• Assistance regarding transaction

closing procedures

• Transaction service agreement implementation and exit strategy

• Implement plan to assess Goodwill and non-amortizing intangible assets


Integrated team of internal and external resources

The buyer’s diligence team consists of both internal specialists and external advisors. However, it is important to note that the internal team has to “own” the diligence process.

Internal Advisors

External Advisors

Project Management

Internal specialists include staff with operational knowledge in the businesses to be acquired, as well as corporate functions. The operational and corporate functions represented on the internal team generally include underwriting, tax, human resources, legal, sales, marketing, accounting, actuarial, compliance, administration, claims, investments, information systems and enterprise risk management.

Diligence (internal and external combined) often involve a large number of participants. Teams of 20-30 people are common; and teams of 50 to 80 people are not unheard of. Coordinating the work of such a large team, and producing reliable results in a short time frame is a project in itself.

External advisors are generally specialists in M&A transactions that provide a broad perspective for evaluating the Target business; in addition, they can provide a broad perspective to the buyer. Advisors generally include investment bankers, accountants, attorneys, actuaries, integration specialists, human resource specialists and information technology specialists.


Diligence: overview

• Insurance Industry, geographic and deal-specific risks and opportunities• Effect of regulatory matters• Actuarial valuation of the Target’s book of business including renewals

coupled with a traditional valuation approach (income/ market)• Target’s forecasting of loss ratios by product and payout patterns• Accounting basis and policy differences• Quality of earnings and cash flows - historical and projected • Quality of net assets and adequacy of capital • Hidden costs, contingencies and commitments• Internal control structure, including Sarbanes Oxley compliance• Synergy identification and capture• Tax and accounting structuring• Identification/quantification of tax exposures/related benefits• Development of purchase price mechanisms and other purchase

agreement protections• Identification of integration and post-transaction transition issues• Preparation for post-transaction activities, including resolution of

purchase price adjustments insights • Employee benefits, information technology systems and risk

management practices• Purchase Accounting under GAAP (PGAAP) – allocation of purchase price

to intangibles and goodwill, which impacts the accretive/dilutive nature of the transaction. PGAAP may be influenced with restructuring of legal entity structure

Typical Transaction Issues

Insights

Financial Diligence

Tax Diligence

Actuarial Diligence

Operational Diligence

IT Diligence

HR DiligenceR

eal T

ime

Cro

ss-F

un

ctio

nal

Ap

pro

ach

Tran

sact

ion

Exe

cuti

on

A

B

C

D

E

F

ValuationG

Isolating and maintaining focus on the critical elements of the deal on a real-time basis can often makes the difference between success and failure


Pre-deal valuation – overview

Valuation of the Target on a standalone basis

Valuation of potential synergies to assist Management in its bid

Pre deal PGAAP analysis to test impact on financials

• Leverage results of Financial diligence (FDD), Tax diligence (TDD) and Actuarial Diligence (ADD) reports to estimate the value of the Target

• Review quality of earnings, Target’s specific drivers, etc., and benchmark to relevant peers

• Consider specific risks (customer concentration, one time attrition of clients due to merger, etc.) in the analysis

• Target valuation is generally performed by company’s internal team, bankers or valuation firms

• Identifying Target’s significant intangible assets for PGAAP purposes• Conduct preliminary analysis to estimate value of the intangible assets and

useful lives• Test the accretive/dilutive impact on the company’s EPS based on the specific

characteristics of the intangible assets

• Consider a multi-disciplinary approach to vet potential expense and revenue synergies

• Estimate a range of synergy values depending on type and risk/probability of achievement

• Consider scenario analysis to stress purchase consideration based on potential synergies

• Reconcile the value of the Target with synergies to the standalone valuation


Synergies in M&A – representative examples

US P&C company acquires Bermuda P&C company• Transaction value

‒ Transaction equity value represented 40+ percent premium to target’ closing share price on transaction date

‒ 100 percent cash consideration

• “Expected to be immediately accretive to EPS and ROE”

• “Target brings complementary, market-leading capabilities to acquirer, enhancing acquirer’s platform and long-term growth opportunities for both companies. The diversification benefits of the transaction also provide significant additional capital efficiencies over time”

International multi-line insurance company acquires Bermuda P&C company• Cost synergies: significant cost savings, pre-

tax run-rate per annum

‒ Rationalization of existing operations globally

‒ Rationalization of central functions

‒ Internalization of Asset Management mandates

• Capital synergies: reduction in SCR for target which would lead to improvement of acquirer’s SII ratio

• Revenue synergies: significant revenue synergies pre-tax run rate per annum

‒ Target specialty products delivered through acquirer’s distribution channels

• Reinsurance synergies: significant reinsurance synergies pre-tax run-rate per annum

Synergy

Sources: Investor presentations


Impact on a buyer’s financials – PGAAP representative example

AssumedDebt

Cash & Stock Payment

Cash

Investment portfolio

Intangible assets

Goodwill

PGAAPPurchase Price

Allocated

to id

entified

assets &

liabilities

Purchase Price Allocation Overview

Other balance sheet items

Loss Reserves/ Policyholder

Benefits

• The accounting requirements for PGAAP falls under US GAAP - ASC 805

• Common representative intangible assets from a transaction include:

‒ Value of business acquired (“VOBA”)

‒ Relationships/Value of Distribution Acquired (“VODA”)

‒ Renewal Rights/Value of Customer Relationships Acquired (“VOCRA”)

‒ Trade name

‒ Internally developed technology

‒ Covenants not to compete

‒ State insurance licenses

• Liabilities typically include the fair value of loss reserves and potentially debt

• Other considerations may include:

‒ Fair value of Non Controlling Interest (“NCI”)

‒ Fair value of investments kept at cost may need to be fair valued

‒ Push-down accounting for tax purposes/Legal entity valuations


Price / Book Value (x)

Inta

ngib

les

/ Pu

rcha

se P

rice

(%

)

$3,260 $334

$250

$923

$1,732

$29,399 $1,560

$4,139

$1,386

$1,932 $690

0%

10%

20%

30%

40%

50%

60%

0.8x 1.0x 1.2x 1.4x 1.6x 1.8x 2.0x 2.2x 2.4x 2.6x 2.8x 3.0x

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Inta

ngib

les

/ Ex

cess

Con

side

ratio

n (%

)PGAAP from a market perspective – P&C example

M&A Activity – Intangible assets / Excess Consideration

M&A Activity – Intangible Asset Allocation and P/BV Multiple

Median 45%

Median 1.6x

Median 25%

Source: Capital IQ, SNL Financial and company public filings.

Average Deal Value1

$2.3 billion

1.6x BV

Avg Excess Available for Allocation$0.86 billion

45% 55%

Intangibles3

$390 millionGoodwill

$470 million

Summary of Market Information

• The Transaction P/BV multiple - all else equal, a higher multiple will result in a lower percentage allocation to the intangible assets

• The Target’s combined ratio - all else equal, a lower combined ratio will result in a higher percentage allocation to the intangible assets

• Indefinite life assets could contribute to a higher intangible asset value, but will not amortize

Impact on NI2

- $29 million

Avg. life- 10yrs

1 Excludes largest transaction2 Assumes 25 percent tax rate3 Indefinite life assets are generally less than 10 percent of total intangible assets. However if the transaction includes Lloyd’s syndicate capacity, this percentage could be greater.

Factors which may impact the allocation of intangible assets:


Biographies


Doug Sweeney(212) 436-5417 [email protected] Managing Director | Deloitte Transactions and Business Analytics LLP Financial Services Industry

Doug is the National Financial Services Insurance leader with Deloitte Transactions and Business Analytics LLP. He has more than21 years of experience providing a wide range of valuation and financial consulting services to leading global financial companies, specifically insurance companies. He has substantial experience in the valuation of business enterprises, business interests, and intangible and tangible assets. Doug has provided services both on a domestic and global basis for a wide range of valuation purposes including: mergers and acquisitions analyses, tax and regulatory compliance, dispute resolution, financial structuring advice, strategic financial planning, and lease financing.

Prior to joining Deloitte, Doug was a senior underwriter at an international property and casualty insurance company. During hissix year underwriting career, Doug’s responsibilities included developing/expanding the book of business by fostering relationships with insurance brokers as well as analyzing the insurance risk profiles of multinational corporations. Included in his analysis was the evaluation of a company’s cash reserves, loss/reserve ratios, and risk diversification techniques.

Presentations and Publications

Doug is a contributing author to Deloitte’s annual Insurance M&A Outlook. He was also a contributing author of a published article on SFAS 157, “Fair value in accounting: building credible and supportable valuations” and has presented on this topic. Doug co-presented Deloitte Dbriefs on: “Capital management for insurers: Cracking the code to monetize the business and rebuild capital”and “Recent Fraud and Corruption Enforcement Trends: Impacts on the Insurance Industry”.

Education and Professional Designations:

Master of Business Administration, Finance, Accounting, and International Business, Stern Business School, New York UniversityBachelor of Arts, Business Administration, LeMoyne College

Biographies


Fahad Khan(212) 436-7810 [email protected] Senior Manager | Deloitte Transactions and Business Analytics LLP Financial Services Industry

Fahad Khan is a Senior manager in the Valuation services team at Deloitte Transactions and Business Analytics LLP. He specializes in the valuation of business interests and privately held companies and primarily serves large private equity and FSI clients in the North East. He has over 13 years of experience in providing valuation and advisory services in a variety of contexts including M&A, financial reporting, dispute resolution and tax planning.

Prior to joining the New York office in 2013, Fahad worked in the Dubai office for seven years providing valuation and financialadvisory services to clients in the Middle East and North Africa (MENA) region. He worked with regional and multinational banks,Sovereign Wealth Funds (SWF) and large family owned conglomerates for M&A, financial reporting, and internal decision making purposes.

Education and Professional Designations:

Chartered Financial Analyst – CFA charter holderMBA (majors in Finance)-Oklahoma State University, Stillwater, Oklahoma B.Sc., General Business - Excelsior College, Albany, New York

Biographies

About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.

Copyright © 2019 Deloitte Development LLC. All rights reserved.

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not asubstitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

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