Insurers seen as targets by private equity

Nov 6, 2006 @ 12:01 am

By Gary S. Mogel

NEW YORK - Private-equity firms increasingly view insurance brokers and companies as lucrative acquisition targets, according to industry observers.

Acquisition announcements can be expected in the next few months, said John Marra, a partner in the transaction services practice of PricewaterhouseCoopers LLP in New York.

However, he and other industry observers declined to mention the names of any specific target companies, citing the potential effect on stock prices.

In the past, the typical in-and-out strategy and short holding period for private-equity investments made the insurance industry - known for its cyclical nature and longer time frames for generating profits - less than attractive to the firms. But that is changing, Mr. Marra said.

"The sheer amount of new money that private-equity firms have raised in the past year or so - $300 billion to $400 billion - has woken them up to the possibility of insurance industry investments," he said.

Private-equity firms have been active investors in insurance startups, and they will be equally active buyers of companies, said Joe Beebe, co-head of the insurance investment-banking group at Keefe Bruyette & Woods Inc. in New York.

Life insurer profitability is expected to continue for the next three years, according to a study released last month by Conning Research and Consulting Inc. of Hartford, Conn. That dovetails with many private-equity firms' approximate time period for holding investments.

"The industry appears to be sustaining historically strong margins, even in the face of lower investment returns," said Terence Martin, a senior analyst at Conning.

Potential deals

USI Holdings Corp. of Briarcliff Manor, N.Y. - the ninth-largest U.S. insurance broker - last week said that it is considering a buyout offer from a private-equity firm, which it declined to identify.

In addition, last month it came to light that Kohlberg Kravis Roberts & Co., along with insurance broker Willis Inc., offered earlier this year to buy Marsh & McLennan Cos. Inc. All three firms are based in New York.

"If Marsh management founders, the pressure on them will grow to do a deal," said Cliff Gallant, senior vice president of research for KBW. "KKR and Willis are biding their time."

In June, Stone Point Capital LLC in Greenwich, Conn. - which has $3 billion in capital, specializes in insurance industry investments and used to be owned by Marsh - led an investor consortium that bought the reinsurance business of Paris-based AXA Group.

AXA's reinsurance company was attractive to investors because it generated an average annual 12% return on investment over the past three years - even though it had to pay unprecedented hurricane claims, said Charles Davis, chief executive of Stone Point Capital.

Investors in that acquisition and others involving insurance and their capital include Vestar Capital Partners ($7 billion), New Mountain Capital LLC ($3 billion), Och-Ziff Capital Management Group ($2 billion) and Crestview Capital Partners LLC ($1.4 billion) - all based in New York - and Hellman & Friedman LLC in San Francisco ($8 billion).

The life insurance industry will be attractive to private-equity firms because of its cash flow, the resurgence of investment products catering to the baby boomer retirement market, the increasing profitability of life reinsurance and the growth of the life settlement sector, according to a study released last month by PWC.

In addition to interest in large insurance brokers, private-equity firms may also "swallow up third- and fourth-tier players," the PWC study noted.

"Brokers are more attractive than insurers because they are not regulated as closely, have less complicated financial statements and don't assume any underwriting or claims-paying risk," Mr. Marra said.

There will also be heightened interest in property-casualty companies - especially in the Bermuda reinsurers established in the past few years - which don't have the legacy risks of more established companies, he added.

"We've seen interest from private-equity firms in reinsurance companies because that's a very capital-driven market, and it's an easier business to enter on the venture side," said Bill Limburg, a senior associate with in Berkeley, Calif.-based financial services consulting firm Patpatia & Associates Inc.

Private-equity firms' exit strategy will probably be to take the acquired companies public, rather than sell them, Mr. Marra added, because they can make more money that way.

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