The relative valuation of the U.S. life and health insurance industry's latest $100 million-plus M&A deal could raise eyebrows at first glance even in the current seller's market, but the headline multiples may not tell the full story.
Horace Mann Educators Corp. announced the $405 million acquisition of the group of companies highlighted by Addison, Texas-based National Teachers Associates Life Insurance Co. on Dec. 10. The purchase price equates to nearly 3.05x the target's Sept. 30 statutory capital and surplus, 2.90x adjusted capital and surplus, and 13.7x its net income for the trailing-12-month period ended on that date, according to S&P Global Market Intelligence calculations.
But as Horace Mann executives explained during a Dec. 10 conference call, the effective purchase price amounts to $330 million when taking into account a planned $75 million dividend of the target's excess capital. Although it is unclear exactly how much of the $75 million will come out of the insurance company versus the various other National Teachers Associates affiliates included in the deal, a value of $330 million would amount to 11.2x the insurer's trailing-12-months net income.
Horace Mann CFO Bret Conklin, speaking during the call, put the multiple at approximately 11x National Teachers Associates' "core earnings" of $30 million for that period, as opposed to what would otherwise amount to 13.5x based on a $405 million deal value.
National Teachers Associates offers specified disease, such as cancer and heart, supplemental health coverage along with short-term disability and hospital indemnity coverage through voluntary worksite marketing to the public education market and certain public sector niches. It will complement and diversify a Horace Mann property and casualty and life insurance franchise that is also focused on educators.
Horace Mann said National Teachers Associates' core earnings include contributions of about $5 million annually from its nonregulated affiliates. Terms of the deal call for Horace Mann to acquire NTA Life Enterprises LLC and Ellard Enterprises Inc. NTA Life Enterprises owns a 91.9% stake in Ellard Enterprises, National Teachers Associates' immediate parent, and a collection of entities engaged in activities such as marketing, information technology, distribution and third-party administration. National Teachers Associates, in turn, wholly owns NTA Life Insurance Co. of New York.
The valuation Horace Mann is paying is above historical norms: For the five $100 million-plus transactions involving a U.S. life and health target announced in the past two years on which S&P Global Market Intelligence has calculated a ratio of deal value to statutory capital and surplus, the median multiple has been 1.95x. But even the unadjusted multiples on the National Teachers deal are far from the highest price a seller has fetched in recent months.
That honor belongs to Nestlé SA's pending sale of White Plains, N.Y.-based Gerber Life Insurance Co. to Western & Southern Financial Group Inc. for an announced price of $1.55 billion, equivalent to 5.22x of Gerber Life's Sept. 30 statutory capital and surplus, or 4.89x when adjusting for the asset valuation reserve. S&P Global Market Intelligence has not calculated price-to-statutory book or earnings multiples for another comparable deal in the life and health space, The Hartford Financial Services Group Inc.'s $1.45 billion November 2017 purchase of Aetna Inc.'s group life and disability businesses in the U.S. But The Hartford provided a ballpark figure upon the deal's announcement that it was paying between 16x and 17x the target's forward earnings.
In a market characterized by strong demand for in-force life and health liabilities, Horace Mann is purchasing a business that, much like Gerber Life, offers a platform for generating new business in an attractive market segment. National Teachers Associates reported sales of $17.4 million across its product lines in 2017, and first-year other accident-and-health premiums accounted for an average of 17.7% of the company's total direct premiums in that line over the past five years.
Of particular attraction may be the profit margins that National Teachers Associates' businesses generate. Fueled by the specified disease products, the company reported a pretax profit margin of 24% in 2017. When normalized to exclude the impact of reserve fluctuations but otherwise calculating the pretax margins on the same basis for both 2016 and 2017, the average result was 18.7%.
As such, Horace Mann anticipates that the acquired business will account for considerably more of its consolidated pro forma pretax income than its revenues.