After Woodbury, AIG on the prowl for more indie B-Ds

Insurer bucking trend as other carriers sell off their brokerage units; 'talking to a handful of firms'

By Bruce Kelly

Aug 1, 2012 @ 2:32 pm (Updated 5:15 pm) EST

AIG
Unfolding at Advisor Group: Fold-ins

AIG will continue to kick the tires on independent broker-dealers, even as it absorbs Woodbury Financial Services Inc. in the coming months.

American International Group Inc. said Tuesday that it has agreed to buy Woodbury, a subsidiary of the Hartford Financial Services Group Inc.

Larry Roth, CEO of AIG's broker-dealer network, Advisor Group, said Wednesday morning that each of the three broker-dealers in its network is currently looking at other B-Ds for “fold-in” acquisitions, with those broker-dealers ranging in size from $25 million to $50 million in gross revenue.

That's much smaller than Woodbury, which has 1,400 producing reps and advisers, and generated $254 million in gross revenue last year.

The broker-dealer industry will continue “to see more transactions,” Mr. Roth said. “The Advisor Group is continuing to look at opportunities for fold-ins. We are talking to a handful of firms.”

The Advisor Group currently has 4,800 reps and advisors with three broker-dealers: SagePoint Financial, Royal Alliance Associates and FSC Securities Corp. Likewise, Woodbury will be a standalone operation under the umbrella of the Advisor Group. Patrick McEvoy will continue to serve as Woodbury's CEO.

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The structure of the Woodbury deal works on several layers, according to published reports. With a number of performance benchmarks in place, the deal eventually could net The Hartford anywhere from $62.5 million to $140 million.

That translates into a purchase price with a potential spread of 24% to 55% of Woodbury's gross revenue, which is one formula the industry uses to value broker-dealers.

AIG will pay as much as $90 million for Woodbury, but the purchase price could be revised to as low as $37.5 million if Woodbury falls short of revenue targets before the deal closes, according to The Wall Street Journal. If Woodbury performs well over the next couple of years, AIG could pay The Hartford an additional $25 million.

Woodbury is currently sitting on a sizable pile of excess net capital, $28 million. As part of the deal, Woodbury will pay The Hartford a special dividend of $25 million.

A spokeswoman for AIG, Linda Malamut, declined to comment on the terms of the deal for Woodbury.

About the Woodbury acquisition, which is scheduled to be completed by the end of the year, Mr. Roth said: “This is a big transaction for the Advisor Group but not a big transaction for AIG.”

He added that AIG has “paid back every nickel” of the $182 billion the insurer received from the federal government during the financial crisis. The Treasury Department still owns 62% of AIG stock, he noted.

“This was just perfect timing,” Mr. Roth said. “Woodbury has a culture and educational training program that focuses on clients' evolving needs to retirement. Eventually, we hope to import some of that culture to our firms.”

Insurance companies such as The Hartford, the biggest buyers of independent broker-dealers in the 1990s, recently have been cutting their retail-brokerage units. The reason is that record low interest rates are cutting into the profitability of products that brokerages owned by insurance companies typically sell, such as variable annuities.

In February, insurer Western & Southern Financial Group said that it was selling the assets of its independent broker-dealer, Capital Analysts Inc., to Lincoln Investment Planning Inc. And in January, Genworth Financial Inc. sold its independent broker-dealer subsidiary to Cetera Financial Group for $78.5 million, plus an earn-out provision.