The Hales Report
THE HALES REPORT
1185 Avenue of the Americas, 32nd Floor, New York, NY, 10036 | [email protected] Issue #20, Vol: 2 October 2, 2018
Inside This Issue Record M&A Year Continues With #1 Marsh Buying #6 JLT Near 13.5x EBITDA pg 1 AIG To Acquire Glatfelter, With Profitable Firemen + Other Programs pg 8 A New #1 Reinsurance Broker? Guy Carpenter + JLT Approaches Rival Aon pg 10 Lloyd’s InsurTech Report Sees Paradigm Shift; Market Returns To Profit In H1 pg 11 Endless Supply Of “Alternative” Capacity? Not So Fast… ILS Less Enthusiastic pg 15 InsurTech Update: Willis Sees Robust Funding; Lemonade Touts Growth pg 16 Argo Broker Survey Sees Optimism Over IT, Lack of Penetration In Cyber & Drones pg 19 Can You Say “Social Inflation”? FL Court Turns $100K Limit Into $8.5M pg 21 Brown & Brown Upbeat On The Economy & Ability To Leverage Data pg 22 Q3 Comes To A Close With High Catastrophe Activity Across The Globe pg 24 California Passes New Law Requiring Female Board Members pg 25 Hales Hits, Bindable Quotes & Deal Diary pg 26
Pace & Size of Intermediary Deals Continues To Grow With #1 Marsh Mac Acquiring #6 JLT For $6.4B (Enterprise Value ~13.5x EBITDA)
#1 worldwide broker Marsh & McLennan surprised almost everyone with a fully priced offer to acquire #6 Jardine Lloyd Thompson for $5.6B cash/debt and $6.4B enterprise value. The surprise was not MMC’s desire to acquire JLT or willingness to pay a 30%+ premium, but the controlling shareholder being a seller.
The stated rationale was to accelerate growth, with JLT having a greater weighting towards international specialty lines, including emerging markets. Overlap in the UK and U.S. will have to be the focus of headcount reductions. The transaction, to be funded 100% with debt and cash on hand, is a “pull forward” of normal M&A activity (averaged ~$1B (spend) annually). For the foreseeable future, save for tuck-in M&A opportunities at Marsh Agency, MMC will not be acquiring much “inorganic” growth.
Exhibit 1
Top 10 Global Broker Ranking - $, B $15.9
$10.0 $8.1
$4.7 $1.9 $1.9 $1.9 $1.8 $1.7 $1.6
#1 #2 #3 #4 #5 #6 #7 #8 #9 #10
Source: Co Reports The Hales Report Contact: [email protected] Page 1
Historical Context, Increasing Size (& “Power”) of Intermediaries: The secular trend of consolidation amongst insurance intermediaries has been a consistent theme over the past 30+ years, reinforced more recently by the increased activity of private equity “roll ups.” Year to date we have seen near record activity with 436 announced deals (vs. 440 at this time last year) involving 4 of the Hales Top 100 intermediaries.
Looking back over roughly 30 years, the Top 20 brokers/agents have now completely consolidated into just the Top 3 brokers: U.S. based Marsh & McLennan, UK based Aon PLC and Ireland-based Willis Towers, each publicly traded. AMAZING.
The base of today’s Marsh & McLennan was effectively three large / transformational transactions (in contrast to peer Aon), most notably #6 Johnson & Higgins in 1997 (added $1.2B of revenue or >35%) and #3 Sedgwick in 1998 (added $1.5B and >35%). JLT comes in as the 3rd largest deal, with $2B of revenue adding 13% to Marsh Mac’s existing $15B revenue base (adding ~23% to the brokerage-only segment of the firm).
MMC’s share of the Top 20 revenues increases to ~30%, which is just 3pts ahead of the 27% share in 1989 (at a time when Marsh Mac was less than 20% of its current size, at only $2.5B of revenues).
Exhibit 2 THREE DECADES OF BROKER CONSOLIDATION 1989 1989* Top 20 2017 2017 Top 20 Rank Broker ($, B) Mkt. Sh. Rank Broker Ownership ($, B) Mkt. Sh. 1 Marsh McLennan $2.5 27% PF Marsh & McLennan Public (NYSE) $15.9 30% 2 Alexander & Alexander $1.2 14% 1 Marsh McLennan Public (NYSE) $14.0 26% 3 Sedgwick Group $1.0 12% 2 Aon PLC Public (NYSE) $10.0 19% 4 Johnson & Higgins $0.8 9% 3 Willis Towers Watson Public (NYSE) $8.1 15% 5 Corroon & Black $0.5 5% 4 Arthur J. Gallagher Public (NYSE) $4.7 9% 6 Willis Faber $0.5 5% 5 Brown & Brown Public (NYSE) $1.9 4% 7 Frank B. Hall $0.4 4% 6 JLT Public (LONDON) $1.9 4% 8 Rollins Burdick Hunter $0.3 4% 7 Hub International Private Equity $1.9 4% 9 Minet $0.3 3% 8 BB&T Insurance Bank / Public $1.8 3% 10 Jardine Insurance Brokers $0.2 3% 9 USI Private Equity $1.7 3% TOP 10 $7.7 86% 10 Lockton Private $1.6 3% 11 C.E. Heath $0.2 2% TOP 10 $47.6 89% 12 Arthur J. Gallgher $0.2 2% 11 Alliant Insurance Private Equity $1.1 2% 13 Bain Clarkson PLC $0.2 2% 12 NFP Private Equity $1.1 2% 14 Hogg Group PLC $0.2 2% 13 Acrisure Private $1.0 2% 15 Faugere & Jutheau $0.1 1% 14 AssuredPartners Private Equity $1.0 2% 16 Jauch & Hubener $0.1 1% 15 BroadStreet Partners Private Equity $0.5 1% 17 Hudig-Langeveldt Group $0.1 1% 16 Edgewood / EPIC Private Equity $0.4 1% 18 Gras Savoye SA $0.1 1% 17 Integro USA Private Equity $0.3 1% 19 Sodarcan $0.1 1% 18 CBIZ Public (NYSE) $0.3 1% 20 Hilb, Rogal & Hamilton $0.1 1% 19 Leavitt Group Private $0.2 0% TOP 20 $9.0 100% 20 Risk Strategies Private Equity $0.2 0% Source A.M Best Review; *Brokerage Revenue TOP 20 $53.7 100% Source: Company Reports, The Hales Report *USI shown pro forma for Well Fargo acquisition; ** Locton Preliminary est
The Hales Report Contact: [email protected] Page 2
It is notable, though, that this is the largest deal for current Marsh & McLennan management (CEO Dan Glaser joined in 2007 as Chairman & CEO of Marsh). The team was initially tasked with fixing internal issues, including fallout from NY AG Eliot Spitzer’s attack on the business (contingent commissions) in the mid-2000s. “Tuck in” M&A reemerged as a focus more recently, including the build out of Marsh Agency (beginning in 2009), but large transformation deals were off the table.
“Starting from about 10 years ago when we were rebuilding some of the capabilities of the firm, we talked about that we needed to earn the right to do a large transaction. A Large transaction would not have made sense for us 5 years ago or 7 years ago. We needed to build the proper foundation. We did so. [And] we maintained lower leverage just in case this kind of opportunity were to ever came about.” - Dan Glaser, Marsh & McLennan CEO, September 2018
Valuation Considerations…Nearing Peak Multiples? PE Taking Notice. Any way you slice it, Marsh Mac clearly paid a full price for JLT, reflecting the scarcity value of large brokers & the price likely necessary to gain commitment from JLT’s largest shareholder (Jardine Matheson Holdings). As highlighted below, at the time of closing (Spring 2019), the valuation looks like ~2.8x forward revenue, ~30x GAAP after-tax earnings and ~13.5x EBITDA.
We’ve discussed at length the substantial activity/competition in broker & agent deals but, based on recent transactions, believe this could be the high-water mark for deal valuations. Several recent financial services deals have pushed into the low to mid teens multiples of EBITDA (incl. claims manager Sedgwick last month).
Exhibits 3, 4 and 5 JLT Forward Revenue JLT Forward Earnings JLT Forward EBITDA Revenue Price-to-Revenue Earnings Price-to-Earnings EBITDA EV-to-EBITDA Spring Spring 2019 $2,250 Spring 2019 3.0 $300 2019 35.0 $600 closing 18.0 $2,200 closing closing ~13.5x 16.0 30.0 ~2.8x 2.9 $250 32.9 ~30x $500 $2,150 2.9 16.0 14.0 2.8 25.0 $2,100 $400 13.8 12.0 $200 25.5 $2,050 12.4 2.7 22.4 20.0 10.0 $2,000 2.7 $150 $300 $2,220 8.0 2.6 15.0 $515 $1,950 $250 $465 $220 $2,070 $100 $200 $400 6.0 $1,900 2.5 $170 10.0 4.0 $1,850 2.5 $1,925 $50 $100 2.4 5.0 2.0 $1,800 $1,750 2.3 $0 0.0 $0 0.0 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E
Source: Company Reports; Consensus Estimates (FX adjusted); Hales Analysis
The Hales Report Contact: [email protected] Page 3
We would not be surprised to see the current PE owners of sizeable agent/broker platforms (18 in the Hales Top 100), with a holding period of more than 3-4 years, looking to take advantage of the current pricing dynamics (and low interest rates), to accelerate exit options over the short to intermediate term.
The JLT deal took a mere 11 days to come together, when a meeting between the 2 CEOs presented “an opening that I had not seen before” (MMC CEO Dan Glaser) = the Asian based owners historic “buy and hold” strategy had changed. The 34% premium could have happened at any time given the strategic nature of the deal. So it’s clear the controlling shareholder had a use for the proceeds in focusing on development of its Asian operations (per SEC filing). Timing is everything.
It’s also worth noting that closest peers Aon and Willis Towers are consumed (both financially and strategically) with their own internally focused restructuring programs, limiting the likelihood of any competing bid.
Strong Growth Profile (At Least Historically): MMC highlighted growth as the #1 consideration. The deal shifts overall revenue from 55% brokerage / 45% consulting to 60% brokerage / 40% consulting. Within brokerage, JLT also has a weighting towards specialty businesses outside of the U.S. (which is only ~$100M of revenues, as part of the build out of JLT’s specialty U.S. platform since August 2014).
“This acquisition is about one word, growth. JLT accelerates our strategy to drive higher revenue growth by pushing MMC further into faster-growing geographies and market segments while enhancing our capabilities. We are stronger together.” - Dan Glaser, Marsh & McLennan CEO, September 2018
While stronger on average, we note that JLT growth has exhibited a slower and more inconsistent growth pattern in recent years, reflecting weaker growth from emerging markets and some external headwinds in Employee Benefits.
Other potential revenue headwinds (at least near term) (i) specialty line commission rates / “yield” in London is likely nearing peaks & (ii) revenue dis-synergies, particularly as competitors perceive an opportunity to poach people and/or accounts.
“We will fight every fight. We're not giving up any account to any other company. We will try to retain all of the business. But, yeah, we've modeled in some revenue dis- synergy because we're a conservative company.” - Dan Glaser, Marsh & McLennan CEO, September 2018
The Hales Report Contact: [email protected] Page 4
Exhibit 6 Annual Organic Growth 9% 9% JLT 8% 7% 7% 7% 7% Marsh McLennan 6% 6% 5% 5% 5% 5% 4% 4% 4% 3% 4% 3% 3% 3% 3% 2% 2% 2% 1% 0% 2010 2011 2012 2013 2014 2015 2016 2017 H1:18 Source: Company reports Exhibit 7 Broker Organic Growth Comparison Company 2013 2014 2015 2016 2017 6M:18
A.J. Gallagher 5.5% 4.3% 3.6% 3.6% 4.4% 5.3% Aon 3.0% 3.0% 3.0% 4.0% 4.0% 4.0% Brown & Brown 2.9% 3.5% 2.6% 3.0% 4.4% 5.4% Marsh & McLennan 3.0% 3.0% 3.0% 3.0% 3.0% 4.0% Willis Towers Watson* 4.9% 3.8% 3.3% -1.5% 4.0% 4.0% JLT 8.5% 6.0% 2.0% 2.0% 5.0% 4.0% Public Composite 3.9% 3.5% 3.0% 2.7% 3.9% 4.2% Other notable / non-public Hub 5.2% 4.7% 5.3% 3.1% 4.0% 2.7% BB&T 4.8% 7.5% 1.4% 0.6% 1.7% 4.2% Source: Company Reports, Hales Analysis; *WLTW brokerage proxy = combined corp. risk & broking + inv. Risk & reins, historical is WSH; Aon total co. 2017 forward;
Additional Financial Considerations: Marsh Mac management expects “modest” GAAP EPS dilution in year 1, including $180M of incremental amortization. As $250M of targeted savings ramp up (3% of combined brokerage expenses). We suspect the figure will prove conservative. Management foresees a neutral EPS impact in year 2 (2020) with accretion thereafter.
On an underlying “cash” basis, accretion is immediate, although we do not view this as a particularly high bar (particularly given low interest rates for the circa $5B of debt to be issued as part of the deal). That said, management expects a “very attractive return” on the deal with a double digit IRR as modeled.
The management team recognizes that it’s all about execution and making the “hard” decisions in a timely manner. A key component of the cost savings is headcount reduction of 2-5%, where Marsh employees apparently do not necessarily have the upper hand. JLT CEO Dominic Burke has already been announced as Vice Chairman of MMC and will serve on the Executive Committee. The Hales Report Contact: [email protected] Page 5
“It's not going to be as to where somebody came from…It will be what is the right structure and who is the right person in the right job; we will pack the biggest punch that we can in the marketplace.” “We will operate in a way that…the sooner the better to get to whatever organizational structure that we finally have.” - Dan Glaser, Marsh & McLennan CEO, September 2018
As alluded to above, Marsh Mac’s debt leverage has long been towards the lower end of peers, providing flexibility to pursue a deal of this size without raising equity. Around $5B of the $5.6B purchase price will be funded in debt, and on a pro forma basis debt-to-EBITDA approaches the max ~3.5x allowed by rating agencies for an investment grade rating (a key focus for public companies).
Note, each of the public brokers remain well below the upper single digit leverage ratios seen across the private equity backed brokers.
Exhibit 8 Broker Debt Leverage Ratios
Trailling 12-mo Forward 12-mo 3.4x 3.1x 3.0x 2.8x 2.5x 2.4x 2.1x 2.2x 1.9x 1.9x 1.5x 1.4x
Marsh Mac PF AJ Gallagher Willis TW Aon Marsh Mac Brown & Brown Source: Company Reports; Hales Estimates; Using Adjusted EBITDA
Future Capital Management Priorities: With around $2B+ of free cash flow previously split between share buybacks and M&A, Marsh will now focus on (i) debt reduction, with a target of ~2-2.25x leverage in a few years, (ii) modest share buybacks, to offset dilution from equity grants to employees and (iii) a continued commitment to opportunistic “tuck in” M&A, particularly for Marsh Agency.
Note, Marsh Mac has so far deployed $2.8B of capital since 2009 to grow Marsh Agency into a $1.3B platform (and a top 10 broker on a stand-alone basis). In line with the rationale for buying JLT, management views the small- to mid- market agency business as having a faster growth profile on a prospective basis.
“We'll be more selective, but I want to be clear that Marsh & McLennan Agency…we’ll allow for some flexibility for the continuation of their strategy.” - Dan Glaser, Marsh & McLennan CEO, September 2018
The Hales Report Contact: [email protected] Page 6 Dowling Hales Acted as Exclusive Financial Advisor to NIP Group, Inc. in the Sale of Marquis Professional Services Practice to Acrisure
Based in Woodbridge, NJ, Marquis Professional Services Practice (“Marquis Professional”) is one of the nation’s leading insurance brokers focused exclusively on providing insurance products and risk management solutions for design professionals (e.g., architects, engineers, construction managers, etc.) spanning a broad array of industries and clients across the U.S.
Dowling Hales served as the exclusive financial advisor to NIP Group, Inc. (the “Seller”) in the sale of Marquis Professional, a division of the Seller’s retail brokerage operation. NIP Group, Inc. is a specialty program administrator ranked among the 100 largest brokers in the U.S.
OTHER RECENT DOWLING HALES TRANSACTIONS
AIG To Acquire Glatfelter, Most Known For Profitable Fireman’s Program, But With Broader Capabilities & IT For AIG To Leverage.
AIG announced the acquisition of well known and well regarded “program manager” Glatfelter Insurance Group. The most sizeable and well known program is Volunteer Firemen’s Insurance Services (VFIS) currently underwritten by Munich Re.
Based on statutory filing disclosures, summarized in Exhibit 9, Glatfelter is one of the largest independent MGAs in the U.S. handling at least $365M of premium (much is missed in the statutory filings given loose reporting requirements). The VFIS-related premium is the most significant piece at ~$220M. Other programs total at least ~$145M, with specialties across municipalities, water & sewer districts, schools, & healthcare.
Although Munich Re underwrites $365 million of premium, in many ways the relationship is more like a “front,” since an offshore Glatfelter “captive” assumes significant underwriting risk. Glatfelter is an “underwriter” from a profit perspective. As a result traditional “fee” based buyers (think PE guys) would not be interested.
Note, while Munich was the largest partner, AIG has been a market for Glatfelter for 40+ years, handling the Accident & Health portion of the VFIS program.
Exhibit 9 NOTABLE NON-AFFILIATED PROGRAM MANAGERS / MGAs
YOY MGAs - 2017 2017 Carrier(s) 2017 2016 Change Glatfelter Munich, AIG $365 $321 14% Glatfelter Underwriting Services $145 $108 34% Volunteer Firemans Fund $220 $213 3% Starr Technical Risks Chubb $345 $390 -11% Hagerty Markel Corp. $313 $274 14% Atlas General Insurance AmTrust $216 $232 -7% Safe-Guard Products International Warranty Group $209 $184 13% Venture Underwriting State National (Front) $197 $168 18% ENERGI Insurance Services HDI Global Ins. $176 $216 -19% SCOR, Munich, Markel, Universal Arrowhead General Ins. Agency $176 $259 -32% Group of NA, Palomar Specialty McNeil & Co. Arch $153 $140 10% Program Brokerage Corp. ProSight $111 $74 51% Strata Underwriting United Specialty Ins. $110 N/A Midlands Management ProSight $109 $110 -1% Source: Statutory statements, Company websites
While Munich surely was in the mix to acquire Glatfelter, AIG is looking to grow and Glatfelter will be the “program platform” with a nearly $400M block of profitable premium (once moved from Munich). Today, AIG as a buyer has a tax advantage relative to other buyers following recent tax reforms and the availability of the company’s ~$7B deferred tax asset (i.e. after tax returns equal pre tax returns for the foreseeable future). The Hales Report Contact: [email protected] Page 8
A public filing for the Glatfelter Employee Stock Ownership Plan (ESOP that owns nearly the entire company) valued the ESOP-owned shares at $324M as of year-end 2016. Considering the growth trajectory, the likely conservative valuation, recent P&C stock valuations, and AIG’s unique attributes as a buyer a purchase price in the $600-$750 million range seems likely.
For employee-owned Glatfelter, the sale to AIG provides for more capital flexibility and a solution to ESOP funding/payouts that were increasingly restricting the company’s ability to grow and invest for the future. Under AIG’s ownership the firm should have a better ability to grow and invest in new programs, products and people.
Beyond the MGA/distribution, Glatfelter’s GIG Re captive in Bermuda has a sizeable (yet un-disclosed) capital base that reinsures much of the business written by Glatfelter. We understand Munich cedes 80% of the ~$220M VFIS premium back to GIG Re, with other programs ceding ~50% to GIG Re (Munich provides some occurrence protection against large losses on both programs). This equates to ~$250M to ~$275M of premium retained by Glatfelter. Glatfelter also brings capabilities across technology, underwriting, claims, and systems that will improve the broader portfolio of AIG programs (which had been a notable contributor to some of AIG’s past underwriting issues / adverse development).
Glatfelter owns two smaller retail agencies which we believe AIG may ultimately look to sell to avoid “channel conflicts” – (i) The Glatfelter Agency, focused in central PA & and northern Maryland and (ii) The Insurancenter, providing business and consumer products across MO, KS, AR & OK and with a specialty in car wash operations.
“Glatfelter Insurance Group is an outstanding strategic fit with AIG, bringing high- quality specialty programs business capabilities, a demonstrated track record of strong underwriting results and proprietary program management technology to our General Insurance operations. Glatfelter’s highly talented leadership team will strengthen our efforts to deliver long-term, profitable growth for AIG.” - Brian Duperreault, CEO, AIG
The deal is expected to close in November, with Glatfelter CEO Tony Campisi reporting to David McElroy, the incoming CEO of AIG’s Lexington.
The Hales Report Contact: [email protected] Page 9
A New #1 Reinsurance Broker? Combination of Guy Carpenter & JLT Re Approaches Size of Rival Aon
On a simple pro forma basis, adding JLT’s ~$300M of reinsurance revenue to Guy Carpenter’s existing ~$1.2B revenue base creates a new #1 reinsurance broker.
That said, revenue dis-synergies are likely, particularly in the reinsurance brokerage business where relationships are key and producer turnover is frequent. For perspective, after Aon’s purchase of Benfield in 2008, the combined reinsurance brokerage revenues declined for 9 consecutive quarters or a total of ~7%.
Aon is not very far behind the combined peers, with ~$1.4B of reinsurance revenue in 2017 (with 6% organic growth YTD). The reinsurance brokerage business remains highly concentrated with the Top 4 (now Top 3) controlling ~90% of the business.
Note, JLT “doubled down” on the reinsurance business in 2013 by purchasing Towers Re (before the Willis Towers merger). Each firm had ~$150M of reinsurance revenues.
Exhibit 10 Reinsurance Brokerage Revenue - $,M $1,500 $1,426 $1,600 $1,400 $1,182 $1,200 $900 $1,000 $800 $600 $295 $400 $200 $- JLT Re Willis Re Guy Aon Guy Carp Carpenter Benfield Pro Forma*
Reinsurance brokerage has been a relative area of strength for brokers, as highlighted in Exhibit 11, recently supported by increased buying and the rate response post 2017 catastrophes (likely both temporary). Exhibit 11 Reinsurance Brokerage Organic Growth Rank Name '17 Revs ($M) 2011 2012 2013 2014 2015 2016 2017 H1:18 1 Aon Benfield $1,426 0.0% 5.0% 2.0% -1.0% -1.0% 1.0% 7.0% 6.0% 2 Guy Carpenter $1,182 5.0% 6.0% 5.0% 2.0% 2.0% 2.0% 4.0% 6.0% 3 Willis Re* (Est.) $900 8.0% 8.0% 8.0% 5.0% 2.0% ~flat 5.5% 4 JLT Re $295 3.0% 6.0% 25.0% 6.0% 1.0% 4.0% 4.0% 6.0% Composite 3.5% 5.5% 5.0% 1.5% 1.0% 2.0% 4.0% 5.9% Source Company Reports, Hales Analysis The Hales Report Contact: [email protected] Page 10
Lloyd’s InsurTech Report To Managing Agents Cautions On Paradigm Shifts; Market Returns To Profitability In H1:18. Evolution Continues.
Lloyd’s recently released a primer and “strategic guidelines” related to Insurtech specifically for managing general agents. The London Market Association engaged Oxbow Partners to explain InsurTech and help managing agents develop their strategy/response.
“It remains tempting for executives to believe that the corporate and specialty markets have complexities that isolate them from material InsurTech-led change. But this is to belie the evidence.” – LMA/Oxbow InsurTech Report, September 2018
The report defines InsurTech as both the development of fast moving/growing startups and also the broader development of technology and faster innovation across the industry (incl. incumbents). We found “section 2.2” – Disintermediation in SME insurance – of particular interest, including a discussion of how the SME insurance value chain is being “re-engineered” through technology and the impact this will have on the distribution of specialty insurance products.
The report acknowledges what we have recognized / written about for some time: the SME market in particular is most ripe for disruption, most significantly because of the small premium dollars involved and expensive/inefficient distribution.
The report details potential risks / changes to the value chain, including (i) disintermediation of brokers, which may not provide administrative services the way they do today and may have inferior access to these customers, (ii) disintermediation of insurers, with the potential for reinsurers (and why not capital markets?) dealing directly with insurtechs and (iii) concentration of purchasing, as SME access points are reduced from several thousand intermediaries to a few hundred platforms.
“There will be a battle between insurers, brokers and InsurTechs to access these customers in these channels…The winners in the battle for customers will be those who can offer seamless integration into distribution platforms and products tailored to specific customers using bespoke data.” – LMA/Oxbow InsurTech Report, September 2018
Exhibit 12 – The Battle For SME Customers
The Hales Report Contact: [email protected] Page 11
One interesting hypothesis detailed in the report is that cloud computing applications targeting SMEs (accounting, outsourcing, banking, etc) could become the primary distribution channel for micro SMEs. “These platforms…are likely to become the gatekeepers to millions of SMEs, similar to the way that social media platforms have become the access point to consumers.”
The report also touches on evolution in the SME insurance product, which could include predict/prevent services, parametric insurance, and more significantly tailored products and pricing (among others). “We see partnerships as being hugely important for product innovation and arguably the best demonstration that InsurTech is now an opportunity for incumbents to work together with innovative startups rather than being disrupted by them.”
While there is also clearly room for improvement on the claims process (and costs) the report acknowledges certain headwinds in the form of poor data capture, TPA agreements that are not rigorously monitored and resources that are allocated based on what is “top of the in-tray” but not the value of the tasks.
“Most insurers have a lot of senior claims resource spending time on low value activities. By realigning this resource, for example onto complex claims to manage indemnity, the payback period on broader claims transformation investments can be surprisingly short.” – LMA/Oxbow InsurTech Report, September 2018
The report also takes a broader view on technology driven change, facilitators of the change and external drivers, including an overview of 15 InsurTech firms (not yet “household names” but in proof of concept stages).
Exhibit 13 – Components of Technology-Led Change
The Hales Report Contact: [email protected] Page 12
Other Topics / Quotes Of Interest …
“Once the value of InsurTech has been proven in a certain area of the business, even if narrow, future implementations could be rapid, both in that organisation and in ‘fast follower’ competitors…Adoption trajectories could quickly become exponential, leaving laggards who have not drilled the foundations for tech-led change behind.”
“To be a winner, managing agents need to make digital and data a Board-level agenda point to ensure that change is not derailed by biases or entrenched interests. They must find an enthusiastic but realistic executive to create a clear vision for a digital future based on both today’s opportunities and likely future developments. They must create the environment to make real change quickly.”
“It is not true that opportunities will necessarily accrue to those who are the current market leaders. Indeed, it cannot even be assumed that insurers will be the winners in the insurance market of the future. In a digital world, technology vendors (both established and today’s InsurTechs) could provide critical infrastructure in tomorrow’s value chain. The balance of power (and therefore profit) between insurers, brokers, other customer ‘gatekeepers’ and technology providers could fundamentally change.”
– LMA/Oxbow InsurTech Report, September 2018
Lloyd’s H1 Results: Separately, Lloyd’s published its 2018 interim results, with the market reporting a modest underwriting profit of £0.6B (compared to £1.2B YOY) and a 1.4pt improvement in the reported combined ratio to 95.5% through the first half of 2018. The improvement was helped by lower catastrophe losses and higher prior year reserve releases; the underlying combined ratio deteriorated 2.1pts YOY to 96.6%.
Exhibit 14 Lloyd's Historical Combined Ratio
114.0%
106.7%
97.5% 97.9% 96.9% 94.7% 95.5% 90.7% 88.4% 90.0% 85.7% 85.7%
Y2008 Y2009 Y2010 Y2011 Y2012 Y2013 Y2014 Y2015 Y2016 Y2017 H1:17 H1:18 Source: Lloyd's, D&P Analysis
The Hales Report Contact: [email protected] Page 13
Gross premiums written increased 2.4% YOY (+8.4% with constant currency), driven by a 10% top line increase in Property lines. Still, the market remains competitive and the focus is on the ongoing evolution of the market under incoming CEO, John Neal.
Recall, Lloyd’s is amidst an ongoing profitability review targeting certain lines of business, in addition to underperforming syndicates with underwriting losses for the past 3 years.
“While much of the Lloyd’s market is profitable, some syndicates and certain lines of business have a disproportionate negative impact on the market’s profitability. Syndicates are being asked to conduct in-depth reviews of the worst performing 10% of their portfolios, along with all loss-making lines, and submit their relevant remediation plans for approval as part of the 2019 business planning process.”
- Inga Beale, CEO, Lloyd’s
Operating costs are also top of mind, as evidenced by the focus on efficiencies and productivity in the aforementioned InsurTech report, with a market expense ratio of ~40% (acquisition costs being the largest component at ~27%).
Thus, we also look towards how the technological innovations implemented by Inga Beale persist under new management. Ms. Beale mandated in March that more risk be placed electronically which, according to the interim report, 16% of risks were placed electronically (above the previously set 10% target).
Ms. Beale also enacted Lloyd’s Bridge, which serves as a digital distribution platform to electronically match cover holders and Lloyd’s Workbench, a system with improved controls and information for the managing agent (set to launch shortly). All in, these steps were taken to remove expenses out of the system, so how they play out under new management will be a topic to watch.
“Lloyd’s is focused on the future, with a strategy that is under constant review to respond to the challenges and opportunities facing the market. Throughout 2018 our key priorities are improving underwriting performance, reducing expenses, and enhancing access to Lloyd’s through technology – supporting our digital evolution.”
- Inga Beale, CEO, Lloyd’s
The Hales Report Contact: [email protected] Page 14
Endless Supply Of “Alternative” Capacity? Not So Fast …
While we are believers that the (re)insurance business was forever changed when capital markets accepted reinsurance as an “asset class” (2012 Tipping Point), the supply / willingness of this capital to participate in the market is not unyielding.
It’s well known that capital markets reinsurance capacity “reloaded” following the catastrophe events of 2017 in anticipation of rate increases / the typical “payback period.” Supply ultimately outstripped demand, resulting in less than anticipated rate improvement and the outlook for reinsurance rates from here is likely flat (at best).
Following continued disappoint in the level of rate increases, and amidst ongoing negative loss creep (particularly on Irma in Florida), it’s becoming clear that ILS investors / managers are less enthusiastic. The following quotes from an Artemis interview highlight this fact:
“So if you have an investor who last year reloaded and this year you say, ‘your collateral is trapped’ there could be less enthusiasm to come back. And that would lead to a real pricing cycle.” I don’t want to put out alarm bells, it’s just that new investors will be trying to understand the history before they make an investment this year.” “Maybe it is a good test to understand the real implications so that this will be a properly priced risk in the future.” - Luca Albertini, CEO Leadenhall Capital Partners
“Some have been shocked by the loss creep. They would probably reload but I don’t think it would be as uniform as before, but I could be totally wrong. I didn’t think we’d replace all the money by year-end [2017] but we did.” “Going forward investors will be a bit more demanding in the returns they want. Pricing only went up by 5% at most.” “Do investors really understand the risk they are running for the returns they’re getting? It isn’t what you’re going to lose, it’s how much you’re going to make in most of the years when losses don’t happen.” - Darren Redhead, CEO of Kinesis Capital Management
“It’s about how good you are at actually projecting your ultimate, because that’s what you sell, your competence in that area.” “[M]any investors now looking back are somewhat disappointed in that they were also sold on the idea that after a big loss there would be rate increases as a payback…And we clearly haven’t seen much in the way of rating increases.” - Dirk Lohmann, CEO Secquaero
The Hales Report Contact: [email protected] Page 15
InsurTech Updates: Willis Sees Robust Funding Activity But Fewer Large Rounds; Lemonade Touts Growth But Underwriting Still In The Red.
Per Willis Towers’s Q2 Insurtech Briefing, insurtech deal volume declined 20% sequentially to $579M, with a 72% increase in P&C funding offset by a 69% decrease in L&H funding volume. The decline was attributed to fewer high-dollar transactions (only 2 surpassed $30M vs. 7 in Q1). The late-stage funding round for PolicyBazaar of $200M was the largest deal in the quarter, nearly doubling its valuation to $347M.
Exhibit 15 Quarterly InsurTech Funding Volume - All Stages
$2,000 $1,852
1,500
$992 1,000 $783 $724 $624 $579 500 $422 $369 $398 $295 $312 $230 $271 $284 $180 $172 $110 $135 $132 $78 $37 $45 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2013 2014 2015 2016 2017 2018 Deal Count P&C 5 4 11 8 8 6 10 8 12 12 13 19 41 18 30 28 22 33 25 41 43 44 L&H 15 8 10 4 11 16 20 15 13 19 15 21 18 16 8 15 16 32 23 10 23 27 Source: Willis Towers Watson Securities
The total count of transactions increased 8% to 71 in Q2 vs. 66 in Q1:18, supported by both P&C (44 vs. 43) and L&H (27 vs. 23), marking the highest quarterly transaction count to date.
Transactions outside the U.S. accounted for 62% of total transactions, with a larger percentage of these deals coming from the UK and China. Over the past 5+ years, only 40% of all transactions have come from outside the U.S.
Of the 44 P&C deals, 52% were focused on distribution, a lesser proportion relative to the 61% for all deals since 2013 which have been focused on distribution.
“With 34 transactions sponsored by (re)insurers, Q2 also set a new record for the volume of incumbent participation in InsurTech investment. Also, (re)insurers generally invested in later rounds, with seed investments contributing to only 3% of transactions.” - Willis Towers Watson Q2 2018 InsurTech Briefing
The Hales Report Contact: [email protected] Page 16
(Re)insurer partnerships with insurtechs also grew with 22 new strategic partnerships formed in Q2 (on top of 22 in Q1).
Most notable: (1) XL Catlin with Praedicat, a liability cat modeling form; (2) Chubb and CyberCube, to offer enhanced protection against data breaches, extortion and other cyber crimes; (3) AXA providing comprehensive insurance coverage for users of a French ride-sharing service BlaBlaCar; and (4) SCOR and Transamerica Ventures partnering with iBeat, a designer/producer of wearable health technology.
Business Update: Lemonade Insurance
Lemonade, the insurtech startup offering renters and homeowners insurance, provided another update on its operating performance in an effort to bring “transparency” to its business model. The company continues to garner a fair amount of attention within the industry (good and bad) given its savvy PR capabilities and sizeable funding rounds (totaling $180M includes a range of well-known VCs).
The three pieces of data that caught our eye were (1) its premium growth expectations (on a still small base), (2) policy sales since inception, and (3) the loss ratio (fair amount of work needed to get to underwriting profitability).
Lemonade, as a “full stack” insurer, files quarterly statutory statements and Q2 results showed top line growth of ~30% to $10M in the quarter and $17M through the first half of 2018. By the company’s estimate “Two years in market, Lemonade has over a quarter of a million active customers, an annualized run rate of $80m in sales and continued hypergrowth.” This implies the company’s current premiums levels have approximately doubled from Q2 levels.
As noted above, Lemonade’s active customers reached 250K after 2 years of operation, which is a gain of ~50K policies since the company’s last update in mid-June. Based on the company’s estimate of run-rate premium, premiums per policy equals ~$120/policy, which is slightly above what we would expect for a standard renters policy and suggests the company may be adding more homeowners policies.
Lemonade’s loss ratio remains a highly scrutinized figure as the company continues to add scale at the expense of underwriting profitability, with the company’s most recent disclosure showing a loss ratio of 130% in H1:18 vs. 260% in H1:17. By the company’s own admission, progress still needs to be made to improve this metric (and the collection of additional data will help).
The Hales Report Contact: [email protected] Page 17
“It [the loss ratio [is still in the red, and about 60% higher than where we’d like it to be. The good news is, for the first time, we’ve reached the point where we have enough data to take action and bring it down. Fixing our Loss Ratio requires fine tuning the machine, tweaking product, pricing, and filings, but we’re already seeing encouraging results.” - Lemonade Blog, June 2018
Exhibit 16 summarizes the financial performance for Lemonade Insurance Co. (the statutory entity). Note, Lemonade adjusted its service agreement with the parent company, distorting the expense ratio and making it not comparable across periods.
Exhibit 16 Lemonade: Statutory Financial Summary Q1:17 Q2:17 Q3:17 Q4:17 Q1:18 Q2:18
Direct Underwriting Ratios Loss Ratio (% DPE) 240.9% 103.7% 118.4% 144.1% 115.7% 114.9% LAE Ratio (% DPE) 103.0% 17.6% 4.8% 3.3% 10.5% 5.2% Loss/LAE Ratio (% DPE) 343.9% 121.3% 123.2% 147.4% 126.1% 120.1% Expense Ratio (% DPW) 433.3% 289.7% 197.4% 111.6% 26.3% 27.0% CY Combined Ratio 777.2% 411.0% 320.6% 259.1% 152.4% 147.1%
Net Underwriting Ratios Loss Ratio (% NPE) 36.6% 89.3% 59.0% 62.2% 67.1% 65.0% LAE Ratio (% NPE) 174.6% 29.5% 5.9% 4.0% 12.6% 6.3% Loss/LAE Ratio (% NPE) 211.3% 118.8% 64.8% 66.2% 79.7% 71.2% Expense Ratio (% NPW) 485.1% 325.9% 211.0% 119.9% 28.5% 28.9% CY Combined Ratio 696.4% 444.7% 275.8% 186.1% 108.1% 100.2%
Ceded Loss Ratio 534.4% 125.0% 392.3% 530.6% 353.0% 360.5%
Source: SNL
The Hales Report Contact: [email protected] Page 18
Argo Broker Survey Sees Optimism Over IT, Lack of Penetration In Cyber & Drones.
Argo Group released the results of their Future of Insurance report, which surveyed Brokers and SMEs across the US and the UK on various issues such as Cyber Security, Autonomous Cars, Blockchain, AI, and Climate Change. For the portion of the survey specific to brokers, respondents were roughly split 50/50 between wholesale and retail brokers. For most broker respondents, issues such as Autonomous Cars, Virtual Technology, AI, and Blockchain were of lower priority. Instead, issues such as Cyber Threats, the Internet of Things (IoT) and Drones were higher priorities.
Cyber… An overwhelming majority (90%) of broker respondents noted less than half of their clients purchase cyber insurance, the main reason being a belief that a cyber- incident will never happen to them and a belief that existing coverage will cover potential losses. Retail brokers also listed cost for clients as an impediment. Higher profile cyber events (WannaCry and NotPetya) have increased awareness.
Exhibits 17 & 18 Percentage of Clients that Demand For Cyber Insurance
Purchase Cyber Insurance Increased Demand Flat Demand Decreased Demand
0 1-10% 11-25% 26-50% >50%
79%
78%
77%
76% 76%
47%
37%
33%
32%
31%
30% 30%
28% 28%
27%
27%
26%
24%
17%
24%
16%
21%
19%
17%
17%
12% 12%
10%
8%
7%
6% 6%
7%
5%
3%
3% 2%
Overall US UK Wholesale Retail Overall US UK Wholesale Retail Source: Co Report Source: Co Report
Disruptive Technologies… Most broker respondents agreed that technology such as AI will help to make them smarter, more efficient and produce better solutions for clients, with artificial intelligence being a complement to brokerage services. This said, a majority of brokers (~70%) fear technology (IoT) will either significantly disrupt traditional insurance or AI will replace parts of the insurance workforce. The concern was roughly equally shared by wholesale and retail brokers, but interestingly the concern over disruption was higher in the US than in the UK.
The Hales Report Contact: [email protected] Page 19
Exhibits 19 & 20
Brokers: IoT Will Significantly AI Will Significantly Disrupt Disrupt Insurance in the Next 5yrs Insurance Distribution Models Or Replace Workforce Strongly Disagree Disagree Agree Strongly Agree
Strongly Disagree Disagree Agree Strongly Agree
48%
44%
42%
40%
39%
55%
50%
49%
49%
32%
31%
44%
29%
27%
24%
23%
22%
21%
19%
19%
27%
25%
24%
21%
11%
10%
20%
19%
19%
9%
18%
7%
16%
6%
15%
12% 12%
11%
8%
7%
US UK
Overall US UK Wholesale Retail
Retail Overall Source: Co Report Source: Co Report Wholesale
A majority (72%) of broker respondents viewed drones as a medium to high priority over the next 12 months. A little under half of broker respondents are currently offering drone coverage, with slightly higher adoption from wholesale brokers. While there is an interest in offering this type of coverage, a large portion (67%) of brokers don’t view drone coverage as being mainstream at this point. The most frequently offered coverages for clients include liability (personal and property damage), payload coverage, and hull (protection from physical damage to drones).
Exhibit 21 Policy Coverages For Drones
Liability Payload Hull Non-owned damage Ground equipment No Coverage
66%
66%
58%
53%
50%
36%
32%
30% 30%
28% 28%
27%
27% 27%
27%
25% 25% 25% 25%
24%
23% 23%
21%
21%
21%
18%
17% 17%
11% 9%
Overall US UK Wholesale Retail Source: Co Report
Exhibit 22 Brokers Plans To Offer Drones Coverage
Currently incorp. drone coverage Next 12-18 months Next 5 years Next 10 years Never
53%
48%
45%
44%
37%
28%
27%
25%
24% 24%
23%
19%
18%
14%
13%
12%
11%
10%
9%
6%
4%
3%
2%
0% 0%
Overall US UK Wholesale Retail Source: Co Report The Hales Report Contact: [email protected] Page 20
Can You Say “Social Inflation”? Florida Courts Turn $100K Insurance Limit Into $8.5M Judgment.
A recent court case out of Florida caught our attention (Harvey v. GEICO), within the context of monitoring “social inflation” / the impact of judicial appointments.
Long story short, despite GEICO tendering a full $100,000 policy limit within 9 days of first claims notice (in 2006), the Florida Supreme Court voted 4-3 that GEICO was liable for "bad faith" to the tune of $8.5M dollars (we found another recent example of a bad faith judgment for $2.8M against GEICO in July 2018).
“Bad faith” has long been a contentious issue in Florida and early case law on this topic extends back to 1938. The issue, as described in a November 2011 Florida Senate report: “Florida’s “bad faith” law allows an insured person or someone who has been injured by an insured person to recover damages from an insurer for failing to settle a claim in good faith when the insurer could and should have done so. Florida has had bad faith remedies in place through the common law and statute for many years, targeted at protecting insurance consumers from unfair practices on the part of insurers.”
Before heading to the FL Supreme Court, an initial $9.2M judgment against GEICO was overturned on appeal. The appeals court found insufficient evidence that GEICO acted in “bad faith” simply by failing to respond to requests for certain information related to the incident (such as the driver’s assets and whether he was driving as part of his job at the time). In his dissent of the latest ruling, Chief Justice Charles Canaday agreed: “In Florida law, mere negligence has now become bad faith. I strongly dissent from this unjustified change in the law.”
At the end of the day, a more active plaintiff’s bar combined with more favorable courts/juries has set the stage for an environment of rapid “social inflation” in insurance. While conservative judicial appointments by President Trump should ultimately have a favorable impact, the impact will be lagged. We are heading deeper into the “Obama years” of the social inflation cycle.
Of course it’s also a state-by-state game, where regulators and legislative action (or lack thereof) can have an impact. California is another example of a state with signs of unabated social inflation, with the CA Insurance Department pressing insurers to (i) significantly expand coverage terms related to recent wildfire damage (i.e. pay contents without itemization, combine unused sub-limits, remove mudslide exclusions) and (ii) review rate levels following the “major tax windfall” under the new tax rules. Perhaps some states/lines just are simply not insurable!
The Hales Report Contact: [email protected] Page 21
Brown & Brown Upbeat On Economy, Ability To Leverage Data & Attract Best In Class People / Firms
Brown & Brown hosted its first ever investor day in New York City on 9/18. Management provided a high level overview of the company and its strategy. We found the following quotes of interest.
Macro commentary was generally upbeat, particularly on the economy.
“The economy is doing quite well. We continue to see across the entire United States in almost every industry, every community that's out there, there's expansion going on. It is really uncommon to go to almost any city in the United States and not see construction somewhere. That's really good. That means expansion of exposure units…So we feel really good.” - Andrew Watts, CFO & Treasurer
We have long viewed “Big Data” and technological capabilities (such as cloud computing) as being a relative advantage to intermediaries. In line with this theme, management described data as a “strategic asset” for the company. Harnessing and better leveraging this data is a key strategy for B&B, including development of a single agency management system over the new few years.
“We value our data as a strategic asset. We constantly mine our data to provide better insights into our customers, teammates and carrier partners and view that as a core part of our business and have for a long time. Again, we are enhancing our capabilities in this area, providing enhanced analytics to our teammates and delivering it faster than we have in the past so we can win more business, retain more business and collaborate with our carrier partners to offer new solutions.” - Carl Owen, Chief Information Officer
On the episodic nature of M&A, and increased pace and size of deals (18 with $96M of revenue vs. 11 with $17M during all of 2017):
“Acquisitions are a little bit like farming or fishing…sometimes the fish are biting and sometimes they're not. But we may talk to somebody – have talked to somebody 10 years ago and it doesn't prove to come to fruition until today…there will continue to be a lot of consolidation in the industry…I feel like we'll have plenty of opportunities in the years to come.” - Powell Brown, CEO & Director
The Hales Report Contact: [email protected] Page 22
The “pitch” for joining Brown & Brown (or strategic) vs. private equity buyers:
“If you own an agency today and you’re thinking about selling your business, whether it's to Brown & Brown or not, I've said this to a number of agency owners, I would say find the firm that you fit the best with culturally and then go get in a corner and make a deal. If you go with the highest price exclusively, you will not be there in three years. That's a nice way of saying probably private equity may pay a little bit more – but my experience and what we have seen is the owner or owners don't want to be involve three years from there; they pull the plug. So it depends on what's important to you.” - Powell Brown, CEO & Director
“When the interest rates do go up, their model changes a little bit – that does not mean they stop. I don't want anybody to think that. The private equity world is here to stay, in my opinion, and they're trying to, reinvent themselves and try to cast themselves in a different light. The answer is its still private equity. It's still short term, and they're not doing something to build something lasting.” - Powell Brown, CEO & Director
Talent is leaving / “aging out” of the industry, with people being the biggest perceived risk and opportunity for Brown & Brown.
“As a broad statement, our industry is woefully unprepared for the coming retirement of a number of talented people…we are proactively approaching this.” “And so we have an active plan at the local level: one, when people are thinking about retiring; two, who would be the right person and we get them involved in that strategy; three, we're always developing…talent, which could potentially be a replacement.” “If you ask me what our greatest challenge is and our greatest opportunity is, it's the same thing. It's people, teammates.” - Powell Brown, CEO & Director
Brown & Brown’s view of the “big mistake” for insurance agents & brokers: (i) bearing underwriting risk of any form, (ii) a failed deal and/or (iii) E&O costs that exceed limits of liability. “We operate the organization [under the mantra] ‘make no big mistakes’ – we’re conservative.”
The Hales Report Contact: [email protected] Page 23
Q3 Comes To A Close With High Catastrophe Activity Both Domestic & International; Still Uncertainty Related To Florence Flood Losses
Since our latest Q3 cat update in Hales#19, the current U.S. insured cat loss estimate according to ISO PCS has increased by $102M (first and final estimate for Tropical Storm Gordon, which made landfall on 9/4 on the Alabama-Mississippi border). This brings the domestic Q3 cat insured loss estimate to $3.9B, compared to the 10-year mean and median of $10.7B and $2.5B, respectively, with 4 events (including Hurricane Florence), pending an initial estimate.
Several estimates from the cat modeling agencies have been published for Hurricane Florence over the past 2 weeks. While there is uncertainty on the ultimate losses stemming from inland flooding and the National Flood Insurance Program “NFIP,” RMS, AIR and Karen & Clark Co. (“KCC”) are consistent with total insured loss estimates in the range of $2-5B.
Looking at insured flood losses solely, RMS estimates $1.5-2.4B (with ~half from NFIP), while CoreLogic estimates $6-10B ($2-5B from NFIP). CoreLogic is noticeably higher than the other cat modeling agencies, signaling the wide range of potential outcomes with Florence and uncertainty surrounding the protection gap in the affected areas.
Internationally, AIR released insured loss estimates for Typhoon Mangkhut in the range of $1-2B, including only damage incurred in China, Hong Kong and Macau. While no cat modelling agencies have released insured loss estimates for Mangkhut’s damages to the Philippines and Guam, insured losses are expected to near ~$1B. Recall, it has been an active quarter internationally (Japan specifically) with Typhoon Jebi estimated to have caused $3-5.5B insured losses and the early July floods in Japan estimated to have caused $2.5-4.0B of insured losses.
Aggregating insured loss estimates from the cat modelling agencies, domestic insured cat losses currently stand in the range of $6-9B and international insured cat losses in the range of $9-15B.
Exhibit 23 ISO PCS Historical Q3 Cat Losses
10 Year Median ($2.5B) $67.2 $70.0
$60.0
$48.4 $48.4 $50.0
$40.0
$30.0
$23.7 $23.7 $19.1 $19.1
$20.0
$16.1 $16.1 $8.4 $8.4
$10.0
$3.7 $3.7
$3.6 $3.6
$3.9 $3.9
$0.7 $0.7 $1.3 $2.6 $1.8 $1.9 $2.1 $0.3 $0.3 $1.3 $2.1 $2.5
$0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Hales Analysis, ISO PCS The Hales Report Contact: [email protected] Page 24
California Passes New Law: No More All Male Board Of Directors
California’s Governor, Jerry Brown, signed into law legislation which requires publicly traded companies headquartered in California to place at least 1 woman on their Board of Directors by the end of 2019 or face a penalty. It also requires companies with 5 directors to add 2 women by the end of 2021, and companies with 6 or more directors to add at least 3 more women by the end of the same year.
The measure was passed by California's state legislature last month, making it the first such law in the United States, though similar measures are common in European countries. “Only 25% (of companies on the S&P 500) have more than two women, and gender parity is rare. Only 23 companies in the Russell 3000 have boards comprised of 50% or more women,” according to a study from PwC.
Exhibit 24 looks at the % of females comprising the total Board of Directors, by market cap, for our friends Dowling & Partners’ P&C (Re)insurance & Broker Composite. The large cap companies, which averaged the largest board size, also averaged the highest percentage of female board members; while small cap’s maintained the lowest. Of the 58 companies in the composite, 18 companies had over 3 female board members, while only one company had 5 women on their board. 4 companies in the composite had zero female board members (1 large, 1 mid, and 2 small cap).
Exhibit 24 P&C (Re)insurance Composite % Of Females On Total Board By Market Cap 21% 19% 16%
Small (<$5B) Mid ($5-10B) Large (>$10B) Source: Company Reports; Dowling & Partners (Re)insurance Composite; Hales Analysis
“One-fourth of California’s publicly traded companies still do not have a single woman on their board, despite numerous independent studies that show companies with women on their board are more profitable and productive.”
- California State Senator, Hannah-Beth Jackson (WSJ Interview)
The Hales Report Contact: [email protected] Page 25
Hales Hits:
Boost Insurance (insurtech development platform) launched Paladin Cyber as its 1st insurtech partner (SMB cyber program launched within 4.5 months). “Over the next few months, Boost will be launching several new programs. Products will include both personal and commercial P&C lines, developed bespoke for both insurtech startups and other high-profile tech brands acting as Boost's distribution partners.”
Willis Re’s Silent Cyber Risk Outlook global survey shows insurance companies expect a “significant increase” in the level of cyber-related losses “across all business lines” over the next year, driven by increasing reliance on technology + high-profile cyber-attacks. It is “clear that the market views silent cyber as a more significant threat in 2018 than it did in 2017.”
Brown & Brown announced the acquisition of Vandroff Insurance Agency, a provider of personal and business insurance products and services based in Jacksonville and Northern Florida, with $1M of revenues. Brown & Brown has now acquired 17 firms so far in 2018 with ~$96M of annual revenue (compared to 11 deals with $17M of revenue in FY 2017).
Assurant Ventures announced a strategic investment in Mojio, a leading tech platform and SaaS provider for connected cars, to explore digital protection and support solutions for vehicle owners & automotive partners, leveraging combined pools of vehicle data.
Kingsway Financial filed with the SEC to change its jurisdiction of incorporation to the U.S. (Delaware) from Canada (Ontario). The move is expected to “eliminate a number of potentially material income tax inefficiencies it believes it would inevitably encounter.”
Navigators announced the expiration of the 30-day “go-shop” period provided by their merger agreement with The Hartford. 44 potential acquirers were solicited and no alternative acquisition proposals submitted during this period.
The Hales Report Contact: [email protected] Page 26
U.S. Deal Diary – Q3 Updates: The 27 deals over the past 2 weeks put the total Q3 count of deals at 154 (vs. 127 total in Q3 2017). So far this year, the deal tally of 436 is slightly lower than 440 at this time last year.
Exhibit 25 U.S. Middle Market Agency Transactions By Quarter / Year
Q1 Q2 Q3 Q4 591 600
500 464 149 439 436 388 400 348 354 366 104 119 331 338 127 154 289 106 300 277 268 91 95 86 106 144 95 108 59 220 236 71 101 160 200 94 67 85 75 86 80 79 145 61 72 68 118 130 72 69 75 42 60 77 60 83 100 57 89 80 48 52 155 109 49 98 122 107 137 91 88 66 91 58 62 91 74 48 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD Source: SNL(Preliminary), Factset, other public sources
Exhibit 26 2018 Most Active Acquiring Brokers - Monthly (Domestic Deals) 2017 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 2018 YTD National Brokers Acrisure, LLC 92 9 7 13 6 3 4 9 9 11 71 AssuredPartners, Inc. 23 2 5 - 3 3 3 4 - 7 27 Broadstreet Partners 35 4 2 2 5 3 1 3 3 3 26 Alera Group 16 1 4 2 2 4 3 1 1 3 21 Hub International 42 1 3 3 3 3 2 1 2 2 20 Arthur J. Gallagher & Co. 26 3 1 1 1 3 5 2 3 19 Brown & Brown 6 - 1 1 2 2 2 5 1 3 17 Seeman Holtz 19 - 1 1 2 2 - 3 4 - 13 NFP Corp. 26 - 1 2 3 2 - 3 1 1 13 RSC Insurance Brokerage, Inc. 8 - 1 - - 3 - 1 - 1 6 Marsh & McLennan Companies 6 - 1 - - - 2 2 - - 5 Hilb Group, LLC 13 - - - - 1 2 1 - - 4 USI, Inc. 8 - - 1 - 1 - - - 1 3 Sub-Total 320 20 27 26 27 30 24 35 21 35 245 Other 271 27 21 16 22 20 22 25 19 19 191 Total Broker Deals 591 47 48 42 49 50 46 60 40 54 436 Source: SNL, Factset, and other public sources through YTD
The Hales Report Contact: [email protected] Page 27
Exhibit 27 2018 U.S. Middle Market Brokerage M&A Since August Acquiree Date Acquirer Acquiree State 1-Aug Undisclosed Buyer Reltco, Inc./National Assurance Title, Inc. FL 1-Aug North Risk Partners, LLC Benefit Solutions Inc. IA 1-Aug Leavitt Group Enterprises, Inc. ComTech Specialty Group UT 1-Aug Armfield, Harrison & Thomas, Inc. Saul & Associates PA 1-Aug Broadstreet Partners Certain insurance assets IL 1-Aug Broadstreet Partners Certain Insurance Assets IA 1-Aug Baldwin Risk Partners, LLC Montoya & Associates, LLC FL 1-Aug NFP Corp. Assets of Specialty Insurance Consultants, LLC CO 2-Aug Seeman Holtz Property and Casualty, Inc. Jem Insurance Services, Inc. FL 3-Aug Seeman Holtz Property and Casualty, Inc. Asenbrenner Insurance Agency Inc. WI 3-Aug M.J. Hall and Company, Inc. Policy renewal rights CA 6-Aug Hub International Assets of Ward Agency TX 7-Aug Norman-Spencer Agency, Inc. American Insurance Professionals, LLC AZ 8-Aug Massachusetts Mutual Life Insurance Company Quilt Insurance Agency, LLC MA 9-Aug Hub International Kilbride & Harris Insurance Services, LLC ME 9-Aug Higginbotham Insurance Agency, Inc. Colt Risk Management Services, LLC TX 9-Aug Bregal Sagemount Align Financial Group, LLC CA 10-Aug Liberty Company Insurance Brokers, LLC Mitchell & Mitchell Insurance Agency, Inc. CA 13-Aug Higginbotham Insurance Agency, Inc. Hull Agency Insurance TX 14-Aug TrueNorth Companies LLC Jewell Insurance Associates, Inc. CO 14-Aug Alera Group, Inc. Barnes Insurance and Financial Services, LLC FL 14-Aug Kaplansky Insurance Agency, Inc. Lit-Flynn Insurance Agency MA 16-Aug Seeman Holtz Property and Casualty, Inc. Merchants Preferred Insurance Services, Inc. PA 20-Aug Huron Capital Partners, LLC Peterson McGregor & Associates LLC MI 20-Aug Broadstreet Partners Book of business NY 21-Aug Keystone Insurers Group, Inc. Coverra Insurance Services, Inc. WI 22-Aug Brown & Brown, Inc. Burke Group, Inc. LA 28-Aug TCB Corporation B. A. Bennett & Co SC 29-Aug David Hirth Insurance Agency Inc. Stark Farmers Mutual Fire Insurance Company MN 29-Aug Seeman Holtz Property and Casualty, Inc. Ritman & Associates, Inc. IN 31-Aug Holman Enterprises, Inc. Murray Insurance Agency Inc. FL 1-Sep Easley Hedrick Insurance & Financial Brandon Scearce Insurance Agency Inc. VA 1-Sep Easley Hedrick Insurance & Financial Eric Arthur Jr. Insurance Services Inc. VA 1-Sep Easley Hedrick Insurance & Financial Moncure Insurance Agency Inc. VA 1-Sep Easley Hedrick Insurance & Financial Roy R Yeatts Jr VA 1-Sep Easley Hedrick Insurance & Financial Sam Nichols LA/VA 1-Sep Broadstreet Partners Certain insurance assets NM 1-Sep Broadstreet Partners Certain insurance assets MN 1-Sep Broadstreet Partners Certain insurance assets IL 1-Sep Vizance, Inc. Sparks Insurance, Inc. WI 4-Sep Arthur J. Gallagher & Co. Wheatman Insurance Services LLC CA 4-Sep Stewart Information Services Corporation Southland Title and Escrow Co., Inc. TN 4-Sep Heartland BancCorp TransCounty Title Agency, LLC OH 4-Sep OneDigital Health and Benefits, Inc. Marder Benefits, Inc. TX 5-Sep AssuredPartners, Inc. Ranew Insurance Agency, Inc. FL 5-Sep Brown & Brown, Inc. Finance & Insurance Resources, Inc. MA 5-Sep Hub International Harman Agency, LLC ID 5-Sep NSI Insurance Group, LLC Weinstein Insurance Services, LLC FL 5-Sep OneDigital Health and Benefits, Inc. LMG International LLC VA 6-Sep Arthur J. Gallagher & Co. United Dealer Services, L.L.C. NY 6-Sep Hub International Cash & Associates, Inc. FL 6-Sep KKR & Co. Inc. Harbor Group Consulting, LLC FL 6-Sep OneDigital Health and Benefits, Inc. Tomorrow's Employment Concepts, LLC PA 10-Sep AssuredPartners, Inc. Roemer Insurance, Inc. OH 10-Sep AssuredPartners, Inc. Sunforest Transportation Insurance Group Inc. OH 10-Sep OneDigital Health and Benefits, Inc. TDC Virginia Benefits & Risk Management, Inc. VA 10-Sep USI Insurance Services, LLC The Gaudreau Group, Inc. MA 12-Sep Alera Group, Inc. Burnham Benefit Advisors NY 12-Sep Alera Group, Inc. Champion Benefits GA 12-Sep Alera Group, Inc. VantagePoint Benefit Strategies Inc. PA 13-Sep AssuredPartners, Inc. Winding Way Holdings Inc. PA 13-Sep Edgewood Partners Insurance Center, Inc. Vanbridge LLC NY 14-Sep Arthur J. Gallagher & Co. Rogers & Young Insurance Services, LLC CA 17-Sep AssuredPartners, Inc. Employee Benefits Business MD 17-Sep Kinney Pike Insurance Inc. Parker Agency VT 18-Sep Brown & Brown, Inc. Vandroff Insurance Agency, Inc. FL 18-Sep Next Generation Holdings Ltd Zodiac Insurance Services, Inc. NJ 18-Sep Worldwide Facilities, LLC McClelland & Hine, Inc. TX 19-Sep Bankers Insurance, LLC Insurance agency assets VA 20-Sep AssuredPartners, Inc. Evolve Consulting Group Inc. MD 20-Sep The Westaim Corporation Creative Risk Underwriters, LLC GA 21-Sep American International Group, Inc. Glatfelter Insurance Group PA 25-Sep RSC Insurance Brokerage, Inc. Select Insurance Markets, LLP/Preferred Personal Insurance Agency, LLP TX 28-Sep AssuredPartners, Inc. Regal Aviation Insurance OR Source: SNL, Factset, other public sources; Note: Does not include deals where target was not disclosed, Excl. Acrisure Deals.
The Hales Report Contact: [email protected] Page 28
Public Broker Valuations:
Exhibits 28, 29, & 30
Broker Price Performance vs. S&P 500 (Since YE'16) 35.0% S&P 500 (30.2%) Broker Composite (30.1%) 30.0%
25.0%
20.0%
15.0%
10.0%
5.0% Source: Factset
0.0%
3/31/17 5/31/17 7/31/17 8/31/17 9/30/17 3/31/18 5/31/18 8/31/18 1/31/17 2/28/17 4/30/17 6/30/17 1/31/18 2/28/18 4/30/18 6/30/18 7/31/18
12/31/16 10/31/17 12/31/17 11/30/17
Historical Public Broker EV/EBITDA Brokers Middle Market Brokers 16.0 14.0x 14.0 13.5x 12.0
10.0
8.0
Source: Company Reports, Factset
6.0
Q1-13 Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Current
Public Broker P/E vs. S&P 500 - 5 Year Brokers S&P 500 22.5
20.0 18.3x
17.5 17.5x 15.0
12.5
Source: Company Reports, Factset
10.0
4/14 8/14 4/15 6/15 4/16 8/16 2/17 6/17 2/18 6/18 2/14 6/14 2/15 8/15 6/16 4/17 8/17 4/18 8/18
10/13 12/13 12/14 10/15 12/16 10/17 10/18 10/14 12/15 10/16 12/17
The Hales Report Contact: [email protected] Page 29
Important Disclosures
This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. This report is not an offer to buy or sell any security or to participate in any investment. The firm has no obligation to tell you when the opinions or information in this report change. The information and statistics contained herein are based upon sources which we believe to be reliable, but have not been independently verified by us. The firm makes every effort to use reliable comprehensive information, but makes no representation that it is accurate or complete. The firm may, at any time, hold a position in the public shares or private equity of any companies discussed in this report.
The Hales Report Contact: [email protected] Page 30