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National Economy Challenge to Insurers, Clients and Brokers: What it Means to the Value of Your Busi

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... or about 18%. Not reflected are stock market losses which could add trillions more ... Madoff, AIG, Citi, GM. Need I say more. 9. Insurance Sector ... – PowerPoint PPT presentation

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Title: National Economy Challenge to Insurers, Clients and Brokers: What it Means to the Value of Your Busi


1
National Economy Challenge to Insurers, Clients
and BrokersWhat it Means to the Value of Your
Business
Presented by Lou Caltavuturo Partner March 19,
2009
2
Agenda
  • Introduction of Hales
  • Brief Touch on Macro Economic Climate
  • Overview of Underwriting Cycle Broker Sector
  • Review of 2008 MA Activity
  • Consolidation Forecast
  • Valuation Trends, Conclusions Outlook
  • Questions Comments

2
3
About Hales Company
  • Hales Company is one of the oldest and most
    experienced advisory and investment banking firms
    solely dedicated to the insurance industry.
    Hales has twenty-five professionals with offices
    located in New York, Harrisburg, Seattle, San
    Francisco, Chicago, Hartford, Washington DC and
    Southern California.
  • Merger Acquisition ServicesHales advises
    clients from the early strategic planning states
    through the closing of a sale, merger or
    acquisition. A comprehensive merger and
    acquisition strategy is customized to meet your
    financial and non-financial goals and objectives.
  • Corporate Finance ServicesHales assists clients
    in accessing senior debt, subordinated debt /
    mezzanine financing and equity to help fund
    working capital needs, internal growth
    initiatives, agency perpetuation plans, ESOP
    financing and mergers and acquisitions.
  • Strategic Consulting ServicesHales provides
    clients with strategic consulting services to
    identify and evaluate strategic alternatives
    designed to help agencies, both public and
    private, improve operations and enhance
    shareholder value.
  • Valuation ServicesAs a leading financial
    advisory firm that only services the insurance
    industry, our experience, knowledge and expertise
    is unmatched in determining an accurate and
    realistic value of your agency. Hales offers
    benchmark and fully-compliant valuations,
    depending on the needs of the client.

3
4
Hales Ranking Transactions and Values
5
Representative Transactions
5
6
Representative Transactions
6
7
2008 A Year to Rememberor Forget
8
Recent Headlines on the Economy
  • Unemployment Continues UnabatedJobless rate tops
    8 in February, the highest since 1983,
    representing 12.5m workers. Pace of job loss
    expected to stabilize but economists forecast 10
    unemployment by year-end. Roughly 4.4m jobs were
    lost since December 2007 - construction and
    manufacturing sectors hit hardest
  • Foreclosures on the RiseNationwide, nearly
    291,000 homes received at least one
    foreclosure-related notice last month, up 6 from
    January. While foreclosures are highly
    concentrated in Florida, the problem is spreading
    to states like Idaho, Illinois and Oregon as the
    U.S. economy worsens. Over 8.1 million
    foreclosures predicted over the next 4 years. In
    addition, 7.5 million other homeowners have
    underwater mortgages, expected to exacerbate
    the issue
  • Household Wealth DecliningUS households lost
    5.1 TRILLION, or 9, of their wealth in the last
    three months of 2008, the most ever in a quarter.
    For 2008, household wealth dropped 11.1
    trillion, or about 18. Not reflected are stock
    market losses which could add trillions more
  • US Retail Sales Fall Less than Expected In
    December 2008, retail sales saw the worst monthly
    decline in the past 4 decades. Retail sales
    declined 0.1 from January, better than the 0.5
    drop that economists had expected, but
    nonetheless returning to negative territory after
    a surprise 1.8 gain in January

8
9
Recent Headlines on the Economy
  • Banking System in CrisisIn 2008, there were 28
    bank failures. By February, 2009, there were 14
    failures and at the current rate, nearly 100
    institutions - with a combined 50 billion in
    assets - will collapse by year's end.
  • GDP Falls through the FloorUS GDP contracted by
    6.2 in 4Q08, double the number that was
    previously expected - the largest drop since
    1982. Despite this, the US Dollar continues to
    show a strong stance with a upward bias. Despite
    problems in the US economy, capital continues to
    fly into the US at break neck pace.
  • Global Trading Declines SharplyThe combined
    value of US exports for July through November
    2008 dropped 18 from 398 billion to 326
    billion two-thirds of this drop was imports.
    Japan, the worlds second largest economy, posted
    a 27 decline in November, the largest slide it
    ever recorded
  • Madoff, AIG, Citi, GM..Need I say more.

9
10
Insurance Sector Performance Property /
Casualty
  • Elevated uncertainty in capital availability, the
    economy and 2008 losses could boost premiums
    slightly but not muchPrice cuts in commercial
    lines in 2007-2008 are likely to resist rapid
    reversal in 2009
  • Forecasts peg industry combined ratios to reach
    102 in 2009 and drop slightly in 2010Assuming
    normal catastrophic losses and excluding
    unexpected shocks
  • Premium growth forecast is nearly 4 for 2010, up
    from a relatively flat 2009Experts assume an
    improving economy with GDP growth near 2 in
    2010, up from -1.3 in 2009

10
11
Annualized PC Rate Change
Source MarketScout
12
Insurance Sector Performance Life
  • Long-term trends for the life industry look
    favorable short-term challenges
    aheadDemographic trends (Baby Boomer retirement)
    will increase the retirement products and
    long-term care insurance and wealth management
    products
  • Generations X Y entering life phase with the
    greatest insurance needsNeed for more careful
    retirement planning and innovative products
  • Other challenges economic slowdown, healthcare
    inflation, volatile equity marketsThe sub-prime
    meltdown, by and large, had relatively minor
    impact on the insurance industry but recent
    market turmoil will challenge the investment and
    hedging skills of insurers and constrain growth
    for a few years

12
13
Health Insurance Premiums
Sources Kaiser/HRET Survey of
Employer-Sponsored Health Benefits, KPMG Survey
of Employer-Sponsored Health Benefits, and Health
Insurance Association of America
14
Health Insurance Premiums
14
Sources Kaiser/HRET Survey of
Employer-Sponsored Health Benefits and Bureau of
Labor Statistics
15
Net Written Premium Growth
Sources Insurance Information Institute and
Fitch Ratings
16
Public Broker Organic Growth
Source Company press releases and SEC filings
17
Public Broker EBITDA Margins
Note Enterprise value is calculated as Equity
Value Total Debt Preferred Stock Minority
Interests Cash Cash Equivalents
Sources Thompson Financial, SEC Filings, and
Reuters
18
Review of 2008MA Activity
19
Acquisition Activity
  • 2007 The Year of the Perfect Storm
  • 2008 The Year of Consolidation
  • 2009 The Year of Uncertainty
  • Economic and financial pressures the impact?
  • Product rates do we move into a hard market?
  • Organic growth rates will they begin to move
    up?
  • Change in capital gains rate 2009 or 2010?
  • Change in healthcare distribution what to
    expect and when?
  • Supply versus demand will we reach equilibrium?
  • Carrier pressures will they continue?
  • Will the credit and capital markets ease?

19
20
Announced Transactions
Total Number of Announced Transactions
60
53
60
35
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49
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46
53
47
35
49
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46
45
38
36
30
22
22
21
188
Source Insurance MA Insights 2009 Annual
Sourcebook
21
Composition of Acquirers by Type
Distribution by Acquirer Type ( of Transactions)
60
53
60
35
47
49
45
46
53
47
35
49
45
46
45
38
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22
22
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188
Source Insurance MA Insights 2009 Annual
Sourcebook
22
Most Active Acquirers 2008
Listed by Number of Announced Acquisitions in 2008
Source Insurance MA Insights 2009 Annual
Sourcebook
23
Most Active Insurance Brokers Acquirers
Listed by Number of Announced Acquisitions
Source Insurance MA Insights 2009 Annual
Sourcebook
24
Influence of Banks
  • Back to basics for banks financial meltdown,
    preserve capital, return on investment, loan
    losses, inability to cross sell effectively
  • Total number of transactions continue to decrease
    from historical levels however, top banks are
    committed Wells Fargo BBT
  • Overall, committed banks have been very
    successful in insurance distribution owning 12 of
    top US brokerage firms
  • Banks will continue to divest of insurance
    distribution over time BNC Corp, Bank of
    America, Webster, Commerce, Union Bank of CA
    (over 500 million in revenue sold over the past
    2 years)

24
25
Most Active Bank Acquirers
Listed by Number of Announced Acquisitions
Source Insurance MA Insights 2009 Annual
Sourcebook
26
Bank Insurance Divestitures
NA Not Available NR Not Ranked
26
27
Influence of Private Equity Groups
  • Illiquidity in the capital markets difficulty
    in obtaining capital
  • Cost of capital has increased significantly
  • Leverage ratios have been reduced impacts
    financial model
  • USI, Hub International, Alliant Insurance
    Services, Ascension all backed by PEGs will
    continue to acquire
  • Pricing differential disappeared during 2008
  • Will continue to play a role in consolidation
    just reduced, back to historical norms

27
28
2009 Beyond What Does All This Mean to Your
Business?
29
Factors Shaping Consolidation
  • Product pricing and the rate environment
  • Organic growth rates
  • Influence of banks and private equity firms
  • Potential change in capital gains rate
  • Need for talent and age factor
  • Carrier pressure on small agencies
  • Changing supply vs. demand curve

30
Supply Versus DemandAre We Moving Toward
Equilibrium?
  • Buyer Demand Has Decreased
  • Public broker multiples
  • Fewer PEG acquirers
  • Fewer bank acquirers of the major acquirers,
    Wells Fargo is concentrating on integration of
    Wachovia
  • Several national brokers have slowed acquisitions
    HRH acquired by Willis, National Financial
    Partners (NFP) financial problems
  • Active acquirers more cautious on pricing

30
31
Supply Versus DemandAre We Moving Toward
Equilibrium?
  • Seller Supply Has Increased Significantly
  • 5-year impact of soft market has forced many
    firms to sell
  • Pressures from carriers on small agencies
  • Competitive market pressures
  • Age of owners
  • Shortage of producer talent
  • Difficulty in perpetuating internally
  • Potential change in capital gains tax

31
32
Why Is Agency Value Important to Understand
  • Represents largest personal asset for most agency
    principals
  • Many agency owners do not understand the key
    drivers of agency value
  • Agency owners tend to believe too many myths in
    the marketplace need to separate truth from
    fiction
  • Valuation should be used as a management tool
  • Proactive, progressive agencies use valuation to
    find ways to create opportunities to build wealth
    and to make better business decisions
  • Reactive agencies wait to hear how others
    evaluate their agency
  • Business decisions you make today have a direct
    impact on your agencys ultimate exit value

32
33
Types of Value Within an Agency
EVERY INTANGIBLE ITEM ULTIMATELY IMPACTS THE
ECONOMIC VALUE OF THE AGENCY, DIRECTLY OR
INDIRECTLY!
34
Hales Recommendations for Best Practices to
Drive Value
  • Target 25 EBITDA margins for PC, 30 for EB
  • Target organic revenue growth rates 10 to 15
    (2008 average 6)
  • Create a Results driven versus Process driven
    mentality
  • Assign responsibility, hold accountable, and
    reward appropriately
  • Create a sales culture - An agency is a SALES
    engine first
  • Review organizational structure to ensure great
    service but allow producers time to sell
  • Review compensation strategies commission rates
    and incentives
  • Emphasize and reward new business
  • Incentives for exceeding goals
  • Include all employees in incentive plans that are
    more formal versus discretionary

34
35
Hales Recommendations for Best Practices to
Drive Value
  • Reduce concentration risk in agency (clients,
    markets, production)
  • Pursue a differentiation strategy unrelated to
    customer service
  • Set up small account departments and eliminate
    commissions on accounts below a certain threshold
  • Use metrics to drive value (revenue per employee,
    new business goals, etc.)
  • Communicate to your staff goals and strategy,
    culture, revenue, retention rates, expectations
  • Hire slowly, fire quickly
  • Convert producer owned books of business to
    agency books
  • Use technology to your advantage
  • Convert to anything else but a C corporation
  • Engage in real strategic planning use
    consultants

35
36
Valuations Conclusion Outlook
37
Valuation - Conclusions
  • Dangerous to judge own value on rules of thumb or
    market rumors
  • Each agency has its own unique set of value
    drivers that ultimately determine individual
    value
  • Buyers rely on profitability, not revenue, to
    determine value
  • Even for agencies with same revenue and EBITDA
    margins, other variables can account for vastly
    different purchase prices (and structures)
  • Beauty is in the eye of the beholder so
    recognize every buyer looks at the same agency
    differently

37
38
Outlook 2009 and Beyond
  • Declining operating results of many agencies
    coupled with lower multiples will result in lower
    pricing
  • Increase in number of sellers
  • Capital is scarce
  • Decrease in demand
  • Low organic growth rates continue at most
    agencies
  • Trending toward historical pricing for most
    transactions
  • Valuation gap between average agency and high
    performing agency is spreading
  • High performing agencies will continue to receive
    a premium

38
39
Supercharge Your Firm
  • Become a High Performing Agency

39
40
Grow Your Business
  • If youre not growing youre losing value
  • Retaining people and clients
  • Driving New Business and High Quality Culture
  • Adopt a Specialization Focus Drives retention
    and sales
  • Acquisitions This is a good time to be a buyer
  • Hiring Producers Become the employer of choice,
    but again, hire slowly

40
41
Q A
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