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Liberty Mutual/Ironshore deal could be insurance M&A model, analysts say


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Liberty Mutual/Ironshore deal could be insurance M&A model, analysts say

Liberty Mutual Holding Co. Inc.'s agreement to buy Ironshore Inc. is a deal that could be a model for insurance mergers in the near term, industry analysts said.

The end of the presidential election quieted the uncertainty that hung over the insurance industry during the campaign season, insurance M&A adviser Grace Vandecruze said in an interview. The players know that interest rates are headed upward and have a sense of how politics in Washington is taking shape. Merger discussions among those on the sidelines will probably resume, said Vandecruze, a founder of Grace Global Capital.

"I think the buyers and sellers are waiting for the dust to settle to decide the next steps," she said.

Liberty Mutual's acquisition of Ironshore makes strategic sense for both parties. Liberty Mutual would get Ironshore's specialty expertise, and Ironshore would leave the investment portfolio of Fosun International Ltd. for an insurance parent.

"It makes better sense to have a more strategic partner that understands the business, that's in the business, where there's a clear sense of synergies, cost saves and revenue enhancement," Vandecruze said.

Both the property and casualty and life sectors of insurance present combination opportunities, given that both areas feature a handful of large companies with about half the market share and hundreds or thousands vying for the other 50%, she said.

Aite Group analyst Jay Sarzen said he does not expect major mergers like those announced in the health insurance sector in 2015. The regulatory environment has not been favorable for such tie-ups, as evidenced by the Justice Department intervening to try to block the megadeals there, Sarzen said in an interview.

Insurance continues to be a low-growth business, so companies will have some incentive to buy into specific lines the way Liberty Mutual proposes to do with Ironshore, with its concentration in excess and surplus underwriting. Excess and surplus, or E&S, is a quirky line that many companies write but do not like to trumpet, as it takes on unique risks that some of their competitors do not want, Sarzen said. The illustration he gives is insuring the tent of a traveling circus.

"Who has tent insurance for an event like the circus?" Sarzen said. Yet someone has to write it.

In a slow-growth environment, Liberty Mutual might consider it an avenue to make some gains, he said.

"It's very possible that they want to find growth, and this is where they think they can get it: excess and surplus," Sarzen said. He likened the deal to The Hartford Financial Services Group Inc.'s acquisition of Maxum Specialty Insurance Group, whose E&S specialty The Hartford purchased to expand its product offering.

Liberty Mutual's management has indicated that the company has other niches in its underwriting lines that it might like to fill out. Asked during a March conference call about strategic possibilities, President and CEO David Long said Liberty Mutual would like to raise its profile in small commercial insurance lines and in the middle-market business.

"And that's something that we need to address, but that's a fix-it thing for us," Long said of the latter market, according to a transcript of his remarks.

Ratings was a driver for the Ironshore sale, and the insurer's rating agency acted as a sort of final arbiter for the deal, Vandecruze said. A.M. Best placed the company's ratings under review with negative implications in 2015 after Fosun announced its plan to complete its purchase of the company. A.M. Best cited the acquirer's credit profile and financial leverage following a spree of acquisitions. In 2016, Fosun was keen to find a buyer that would allow Ironshore to maintain at least an A- rating from A.M. Best. The rating agency reacted positively to the Liberty Mutual deal announcement because it would remove Ironshore's exposure to Fosun's credit profile.