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AssuredPartners deal shows continued private equity zest for insurance brokers

2018 US Property Casualty Insurance Market Report

Fintech

Fintech Funding Flows To Insurtech In February

Lemonade Growing Premiums Faster Than Esurance's Homeowners Business Did

U.S. Life & Health Insurance Market Report


AssuredPartners deal shows continued private equity zest for insurance brokers

A recent transaction for a controlling stake in AssuredPartners Inc., which will see it return to its original private equity backer, maintains the strong pace of insurance broker deals.

Strong and predictable cash flow, low capital expenses and high recurring revenue streams continue to attract private equity investment dollars to the insurance brokerage sector, said Phil Trem, executive vice president at MarshBerry.

In addition to traditional private equity funds, pension funds and family offices have also been keen on the insurance brokerage industry, Trem said in an interview. MarshBerry tracked some 580 brokerage deals in 2018, the highest count the company has recorded in a single year. Of those, 346 deals included private capital buyers, he said.

Combined with unannounced deals, MarshBerry estimates that the total number of insurance broker deals in 2018 could have been as high as 700. Demand remains strong while supply has not slackened, Trem said.

"We expect to see continued deals where independents are selling to the larger aggregators, as well as those private-capital backed firms finding new capital solutions to continue with their existing business models," he said.

GTCR LLC is a rare boomerang investor in AssuredPartners, having helped get the broker off the ground in 2011 before selling its equity stake to Apax Partners LLP in 2015.

The return play was a surprise to AssuredPartners, according to co-founder and CEO Jim Henderson, but it may end up being a pleasant one. The company's new and original backers will not have to familiarize themselves with the operation, and AssuredPartners can continue its pace of expansion toward its desired spot among the top 10 brokers, Henderson said in an interview.

"We want to continue to improve our organic growth. We've made very good strides to do that, and there's a commitment to do it," the CEO said. GTCR's backing will widen AssuredPartners' pipeline for larger acquisitions when they present themselves, Henderson said. A different fund advised by Apax Partners will maintain a minority stake in the broker.

"With these two very well-capitalized [private equity] firms in back of us, we feel like if and when we need the capital to grow by larger chunks, we will," Henderson said.

Media reports said the deal gave the broker an enterprise value of $5.1 billion; Henderson did not confirm or deny that valuation.

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Wells Fargo analyst Elyse Greenspan said private equity's ongoing appetite for brokers is consistent with her outlook for strong organic growth for the sector in 2019. Her cash EPS estimates for public brokers for 2019 indicate that the group continues to hold valuation upside, Greenspan wrote in a Feb. 21 research note to clients.

While valuations have been at an all-time high, the deal market is exposed to a couple of macroeconomic sensitivities, MarshBerry's Trem said. Higher interest rates would dampen the pace of private equity purchases, as would a slowing economy.

Private equity investors often value buyouts based on how they forecast what businesses are worth in the near term, so a souring economy could discourage some of that capital, Trem said.

"When expected [economic] growth starts to slow down ... we think that may cause a little bit of a pullback on valuation," the adviser said.


Insurance
2018 US Property Casualty Insurance Market Report

Highlights

S&P Global Market Intelligence’s 2018 US Property & Casualty Insurance Market Report offers a five-year outlook for the P&C sector, which should return to underwriting profitability for the first time since 2015.

Oct. 26 2018 — The federal tax reform President Donald Trump signed into law in December 2017 should help provide for an extended period of P&C industry profitability in 2018 and beyond as companies benefit from the lower corporate tax rate, but the impact is not limited to after-tax profitability. Actions by several prominent European-headquartered insurers to change the way certain of their U.S. business is reinsured materially impacted premium growth rates in the first quarter of 2018 and are likely to affect full-year results.

1 quarter does not a trend make

Historically strong results for the State Farm group in the first quarter
helped drive favorable comparisons in several key measures of underwriting profitability. To the extent the improvement continues for State Farm — the industry’s largest group based on direct premiums written — it could provide an additional tailwind for 2018 and beyond.

While there is a risk of recency bias in reading too much into a single quarter’s worth of data, the industry was already positioned for improved underwriting results in 2018. The second half of 2017 saw elevated catastrophe losses as the United States was hit by three landfall-making hurricanes and an unusual spate of fourth-quarter wildfires in California. Projected results for 2018 and subsequent years, all of which show combined ratios of less than 2017’s total of 103.5%, assume a normal catastrophe load.

Auto repairs in progress

Competition will remain intense in certain non-auto business lines given ample reinsurance capacity, high levels of industry capitalization and a macroeconomic environment that remains characterized by relatively slow growth in gross domestic product. Though modestly higher business volume driven by that economic expansion will help offset downward pressure on premiums, the industry will be challenged to achieve profitable top-line growth.

Trends in litigation will increasingly weigh on underwriting results in several business lines, including professional lines and the Florida homeowners business. They also could lead to greater demand for coverage, particularly for new and emerging risks.

The macro view

A rising federal funds rate and 10-year Treasury yields that have reached seven-year highs bode well for an industry that has long been suffering from low interest rates. And the relief cannot come quickly enough after the industry’s net yield on invested assets slipped to a new low of only 3.03% in 2017. Though projected results provide for increasing yields from that floor, the improvement will still take place gradually and is unlikely in and of itself to materially impact how companies are underwriting business

S&P Global Market Intelligence client? Click here to login and read the full 2018 US Property & Casualty Insurance Market Report.

The projections reflect various assumptions regarding premiums, losses and expenses. They are a product of a sum-of-the-parts analysis of individual business lines that is informed by third-party macroeconomic forecasts, historical trends and recent market observations that include first-quarter 2017 statutory results and anecdotal commentary about market conditions. Projected results are displayed on a total-filed basis and are not intended for application to individual states, regions or companies. S&P Global Market Intelligence reserves the right to update the projections at any time for any reason.

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U.S. Insurance Market Report – Property & Casualty (June 2017)

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Fintech
Fintech Funding Flows To Insurtech In February

Mar. 21 2018 — Insurance technology companies took center stage in the month of February, attracting the most investor dollars of the various financial technology subsectors that S&P Global Market Intelligence tracks. Overall funding in the financial technology sector declined about 10% from the prior month, however, based on the disclosed value of deals involving private U.S.-based companies that closed in each period.

Two health-insurance-focused startups were key drivers of the $216 million that flowed into insurtech. These were CollectiveHealth and Bind Benefits, which closed on $110 million and $60 million funding rounds, respectively. Both provide tech solutions to companies that self-insure (i.e. provide health coverage for their employees with their own money rather than using an outside insurance company.)

This was a departure from last month, when investment and capital markets technology was the most well-funded, bolstered by capital raises from several robo-advisors, including Wealthfront and Acorns. Meanwhile, insurance technology companies only closed on $71.3 million worth of transactions during the month.

Already a client? Access more data and insights from the full report here.

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Insurance
Lemonade Growing Premiums Faster Than Esurance's Homeowners Business Did

Feb. 28 2018 — Insurtech startup Lemonade Insurance Co. is demonstrating impressive growth when viewed in the context of Esurance Insurance Co., which was in the vanguard of selling insurance online when it was founded in the late 1990s.

Esurance began writing renters and homeowners insurance more than a decade after its founding. It grew renters and homeowners policies quickly, going from about $9,000 in direct premiums written in the third quarter of 2012 to $25.5 million in the third quarter of 2017. Lemonade, by contrast, hit the $2.5 million mark in five quarters, as opposed to eight for Esurance.

Lemonade premium growing faster than Esurance's reters/homeowners business at same age

While Esurance had already made inroads in auto, renters and homeowners insurance were new territory back in 2012. It began selling renters insurance in five states that year, added homeowners policies in the following yea, and continued to expand both lines over the succeeding years. This data comes from filings submitted to the National Association of Insurance Commissioners. Insurers report only "homeowners" premiums in these filings, but the category is broader than that. It also includes renters insurance.

But there are also differences between Lemonade and Esurance. Since Esurance sells auto insurance, it offers discounts on homeowners insurance to customers that bundle, which Lemonade cannot do. Esurance is also owned by Allstate Corp., a relationship that offers vast capital resources but, at the same time, means that Esurance does not have the same autonomy that a startup like Lemonade possesses.

While Esurance might not have grown its homeowners business as quickly, it bested Lemonade in another area: loss ratios. On average, its loss ratio was about 70% in its first five quarters of operation, versus 102% for Lemonade. The first quarter of 2017 was particularly rough for Lemonade, when it recorded a loss ratio of 241%. The company acknowledges these struggles, writing in a January 23 blog post that underwriting was "pretty shoddy" in the early days. But with the influx of more data, its underwriting models have improved, Lemonade wrote.

Geography

In terms of where they write business, the two companies took different paths. Whereas New York was the first state where Lemonade wrote, it is still not a major area of focus for Esurance. Esurance does not write renters business in New York (only homeowners), and in 2016 the state made up less than 1% of its total homeowners direct premiums written. Esurance began with several Midwest states — Illinois, Missouri, Ohio, and Wisconsin — and has not specifically gone after states with large metropolitan areas like Lemonade has. For instance, Esurance has avoided California whereas Lemonade quickly expanded into the Golden State. In the third quarter of 2017, Lemonade wrote 1.7x as many premiums in California as it did in New York.

California eclipsing New York as source of Lemonade Insurance Co.'s direct premiums written ($M)

California is a larger market, however. Insurers wrote about $7.70 billion in direct homeowners premium there in 2016, versus $5.25 billion for New York. State Farm Mutual Automobile Insurance Co. was the leader in California, with about 19.5% of the market, while Allstate captured the most market share in New York, with 14.4%. State Farm was not far behind Allstate in New York, though, with 13.8% of the market.

While fourth-quarter 2017 statutory data is not yet available, we know that Lemonade entered Nevada, Ohio and Rhode Island in October and November, based on the company's website. Lemonade has notably avoided Florida, which is not only the largest homeowners insurance market in the U.S., but also has a high average premium relative to the number of households there.

Other startups have also been taking their time before entering the Sunshine State. As Swyfft LLC CEO Sean Maher explained, coastal states require a significant amount of expertise. But his company plans to do business there soon, shooting for a June launch.

Competition

As Swyfft shows, Lemonade has some competition from other insurtech startups. Hippo Analytics Inc. and Kin Insurance Inc. are other examples, though they do not also write renters business like Lemonade does. Meanwhile, there are a handful of companies that offer renters insurance, but not homeowners insurance. These companies write in more states, which makes sense given that it takes much more volume to achieve the same amount of revenue from renters insurance that one would receive from homeowners insurance. On average, annual U.S. renters premiums were only about one sixth of U.S. homeowners premiums in 2015, based on data available from The Insurance Information Institute, an industry association.

u-s-insurtech-companies

We estimate the potential renters insurance market in the U.S. is about $8 billion in size. By our calculations, California was the largest market for renters insurance, at roughly $1.2 billion, followed by Texas with about $854.4 million and New York with $720.4 million.

Esurance can be a case study for the renters insurance market as well. It offered renters insurance in more than 20 states as of the end of 2016, though there were only three where it offered renters but not homeowners coverage: Arkansas, Louisiana, and West Virginia. They illustrate how much less the renters insurance line produces in terms of premium. In 2016, it only generated $423,000 in combined premium from those states.

Selling renters and homeowners insurance online is not a new concept, but companies like Lemonade seem to be putting a new spin on it. Lemonade has added more innovations — such as a chat bot named Maya — and has streamlined the process, which appears to be winning over customers. Whether it can achieve this growth while also turning a profit, though, remains to be seen.

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U.S. Life & Health Insurance Market Report

Highlights

U.S. life industry direct premiums and considerations will decline for the first time in four years in 2017 as regulatory uncertainty stymies sales of certain types of individual annuities, a new S&P Global Market Intelligence report projects.

Jul. 25 2017 — U.S. life industry direct premiums and considerations will decline for the first time in four years in 2017 as regulatory uncertainty stymies sales of certain types of individual annuities, a new S&P Global Market Intelligence report projects.

The U.S. Life and Health Insurance Market Report presents a five-year outlook for premium writings in the life, annuity, and accident and health business, along with other select measures of industry performance.

We project direct premiums and considerations across the life, annuity, and accident and health business lines of approximately $654.6 billion, down 1.2% from 2016's record result of $662.6 billion. In subsequent years, we project low- to mid-single digit percentage growth in direct premiums and considerations in reflection of an expected rebound in annuity sales.

The projection for lower direct business volume in 2017 reflects an expectation for a sharp decline in ordinary individual annuity considerations as companies navigate the uncertainty associated with the implementation of the U.S. Department of Labor's Conflict of Interest rule, more commonly known as the fiduciary rule. Direct ordinary individual annuity premiums and considerations fell by 10.9% year-over-year in the first quarter of 2017 as lack of clarity about the manner in which the new presidential administration planned to proceed with the fiduciary rule's implementation, if at all, weighed on sales.

Our outlook projects a decline in ordinary individual annuity premiums and considerations of 11.5% in 2017, followed by a rebound in subsequent years as the industry gets a better handle on the new regulatory landscape.

Demand for pension risk transfer agreements represents a key factor supporting a positive near-term outlook for direct group annuity premium and considerations. S&P Global Market Intelligence projects growth in group annuity direct premiums and considerations of 3.3% in 2017, helping to partially offset the expected reduction in ordinary individual annuity business. It remains too early to tell how recently completed, proposed, and rumored transactions involving the structures of several large U.S. life insurance groups may impact premium growth trends. MetLife's separation of most of its U.S. retail businesses into Brighthouse Financial Inc represents the most impactful transaction given the company's standing as the largest U.S. life insurer by asset size, but it is hardly the only potentially transformative deal in the works. AXA announced plans in May to pursue an initial public offering of a stake in its U.S. life business. Published reports recently indicated that Manulife Financial Corp. may be eying a similar approach for John Hancock Life Insurance Co. (USA) and its affiliates.

A higher interest rate environment would also be beneficial for an industry that has struggled through a low-for-long rate environment. Yields on the 10-year treasury note through the first six and a half months of 2017 have remained well above the sub-2% levels that persisted through much of 2016. But they have not recently revisited their December 2016 highs, suggesting that a conservative approach to product design and pricing remains in order.

Access more data and insights from the full 2017 U.S. Life & Health Insurance Market Report.

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