Title: National Economy Challenge to Insurers, Clients and Brokers: What it Means to the Value of Your Busi
1National Economy Challenge to Insurers, Clients
and BrokersWhat it Means to the Value of Your
Business
Presented by Lou Caltavuturo Partner March 19,
2009
2Agenda
- 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
3About 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
4Hales Ranking Transactions and Values
5Representative Transactions
5
6Representative Transactions
6
72008 A Year to Rememberor Forget
8Recent 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
9Recent 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
10Insurance 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
11Annualized PC Rate Change
Source MarketScout
12Insurance 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
13Health Insurance Premiums
Sources Kaiser/HRET Survey of
Employer-Sponsored Health Benefits, KPMG Survey
of Employer-Sponsored Health Benefits, and Health
Insurance Association of America
14Health Insurance Premiums
14
Sources Kaiser/HRET Survey of
Employer-Sponsored Health Benefits and Bureau of
Labor Statistics
15Net Written Premium Growth
Sources Insurance Information Institute and
Fitch Ratings
16Public Broker Organic Growth
Source Company press releases and SEC filings
17Public 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
18Review of 2008MA Activity
19Acquisition 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
20Announced Transactions
Total Number of Announced Transactions
60
53
60
35
47
49
45
46
53
47
35
49
45
46
45
38
36
30
22
22
21
188
Source Insurance MA Insights 2009 Annual
Sourcebook
21Composition 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
36
30
22
22
21
188
Source Insurance MA Insights 2009 Annual
Sourcebook
22Most Active Acquirers 2008
Listed by Number of Announced Acquisitions in 2008
Source Insurance MA Insights 2009 Annual
Sourcebook
23Most Active Insurance Brokers Acquirers
Listed by Number of Announced Acquisitions
Source Insurance MA Insights 2009 Annual
Sourcebook
24Influence 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
25Most Active Bank Acquirers
Listed by Number of Announced Acquisitions
Source Insurance MA Insights 2009 Annual
Sourcebook
26Bank Insurance Divestitures
NA Not Available NR Not Ranked
26
27Influence 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
282009 Beyond What Does All This Mean to Your
Business?
29Factors 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
30Supply 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
31Supply 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
32Why 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
33Types of Value Within an Agency
EVERY INTANGIBLE ITEM ULTIMATELY IMPACTS THE
ECONOMIC VALUE OF THE AGENCY, DIRECTLY OR
INDIRECTLY!
34Hales 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
35Hales 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
36Valuations Conclusion Outlook
37Valuation - 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
38Outlook 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
39Supercharge Your Firm
- Become a High Performing Agency
39
40Grow 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
41Q A