In $1.1B deal for The General, Sentry doubles-down on nonstandard auto again

A newly announced transaction shows that nonstandard auto insurance business continues to fetch interest from prospective buyers even as appetite for the more commoditized standard and preferred private-passenger auto risks remains subdued.

Sentry Mutual Holding Co. announced Sept. 12 that it would pay $1.1 billion to acquire the group of nonstandard auto insurers led by Permanent General Assurance Corp. from American Family Insurance Mutual Holding Co., not including the assumption of liabilities and prospective capital injections. The addition of the entities that do business as The General would increase Sentry's private auto writings by 71.3% on a pro forma basis and boost its nonstandard auto presence by a meaningfully larger amount in a transaction that comes 19 years after the same buyer lifted its market presence by 57.4% through inorganic means.

The new owner will be hard-pressed to replicate the success American Family Mutual Insurance Co. SI reaped since buying The General from a group of investors led by Capital Z Partners Management LLC at the end of 2012. The proposed purchase price is more than 4.5x the $241.6 million that American Family paid 12 years ago, as The General's private auto direct premiums written came in more than 4.0x higher during the trailing-12-month period ended June 30, 2024, than in calendar year 2012.

The transaction will have market-share implications for the US private auto market as we estimate that it, in combination with the American Family-controlled Main Street America Insurance Inc.'s prospective personal lines exit, would likely lead to the remaining group members falling to No. 10 from No. 8 in 2023. Sentry, meanwhile, would move up three places to No. 16, all else being equal. These figures reflect trailing-12-month private auto direct premiums written of nearly $1.25 billion for The General, resulting in pro forma volumes of $2.93 billion for Sentry and $5.75 billion for American Family. The latter figure will be understated as the runoff of Main Street America policies will presumably transpire over a longer time frame, but we are assuming Auto Club Exchange Group would surpass American Family in the No. 9 position regardless, given its relatively faster rates of expansion in recent periods.

The agreement continues a long history of M&A activity in the US nonstandard auto business, but with notable timing that represents the first sizable deal announcement in the business niche coming out of a particularly challenging underwriting cycle.

Private auto results began to deteriorate significantly in the second half of 2021 and endured difficult years in both 2022 and 2023 before showing signs of a dramatic recovery in 2024. The General was not immune from those challenges. While it is not meaningful to calculate ratios based on the net results of Permanent General and its affiliates given the presence of an affiliated 100% quota-share reinsurance arrangement, the companies generated direct-basis private auto combined ratios of 109.2% and 116.6% in 2022 and 2023, respectively, up from 103.1% in each of 2018 and 2019 on a pre-pandemic basis.

Private auto market leaders State Farm Mutual Automobile Insurance Co. and The Allstate Corp. have significantly enhanced their nonstandard auto capabilities through M&A, with the former having bought the parent of MGA Insurance Co. Inc. in 2020 and the latter buying both National General Holdings Corp. and Safe Auto Insurance Co. in 2021. Kemper Corp. also boosted its nonstandard auto writings in 2021 by buying American Access Casualty Co.

Meanwhile, the appetite for inorganic growth in standard and preferred auto has remained muted. Main Street America announced Aug. 29 that it would exit personal lines. Kemper opted in 2023 to wind down the preferred portion of its personal lines business after a strategic review process that contemplated a sale, among other options.

Sentry has a more distant history of inorganic growth in the nonstandard auto business, having effectively added $323.5 million in private auto direct premiums written in November 2005 by buying Viking Insurance Co. of Wisconsin and subsidiary Peak Property & Casualty Insurance Corp. from Royal & Sun Alliance Insurance Ltd. for $200 million. That transaction materially boosted a private auto business that generated $563.5 million in direct premiums written in 2005 on its own.

Since then, growth for Sentry's Dairyland-branded private auto writings, at a compound annual rate of 3.1%, has been a bit slower than the rest of the market's, at 3.8%. The group's $1.56 billion in 2023 direct premiums written on a stand-alone basis includes both nonstandard auto and powersports business, which writes motorcycle insurance in partnership with Harley-Davidson Inc. as well as coverage for various types of all-terrain vehicles, dirtbikes and snowmobiles. Our analysis of disclosures in rate filings identified at least $113.7 million in powersports direct premiums written in 2022 for the combination of four of the seven Sentry group members that underwrite the business, so the actual group-level total was undoubtedly higher.

Notably, the acquisition represents Sentry's most meaningful strategic action since it converted to a stock insurance company from a mutual insurer at the start of 2021. Sentry billed the conversion as a way to enhance its ability to engage in M&A activity.

The General's expansion has greatly exceeded the US private auto market's as a whole while part of American Family, with an 11-year compound annual growth rate of 12.4%. This compares with 3.3% for the rest of its current parent's private auto business and 5.9% for the entire industry. A direct-to-consumer business model that became one of the auto insurance business's best-known brands through multimedia advertising, The General has expanded dramatically since 2012, both in existing markets and by entering new states. It produced $154.3 million in private auto direct premiums written from 22 states and the District of Columbia in 2023 for which it had no volume 11 years earlier. Its writings in states that generated at least some premium volume in 2012 were nearly 3.5x higher in 2023 than in 2012.

It appears that Sentry will follow a similar approach to operating The General as the one that proved successful for American Family. Sentry and The General will retain their separate brands, headquarters and distribution systems, with Dairyland business produced through an independent agency network that includes Harley-Davidson Insurance Services Inc.

The deal is expected to close by the start of 2025, subject to regulatory approvals.

J.P. Morgan served as buy-side financial advisor, with Sidley Austin LLP providing legal counsel to Sentry. The sell-side financial and legal advisors were Goldman Sachs and Foley and Lardner LLP.