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This presentation provides an overview of valuation and critical assumptions in mergers and acquisitions in the (re)insurance industry. It also discusses the consequences of mergers and acquisitions, market dynamics, and key conclusions.
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Mergers and Acquisitions in the (Re)Insurance Industry Casualty Actuaries in Reinsurance Seminar Boston, Massachusetts June 16, 2000
Presentation Overview • Valuation • Overview • Critical Assumptions • Example • Balance Sheet • Income Statement • Total Value • Merger consequences • Overview and Critical Assumptions • Example • M&A market dynamics • Statistics • Conclusions • Questions?
ValuationOverview The valuation is the sum of : • The “true value” of the balance sheet (old business) • The “true value” of the current and future business on an “as is” basis Market Value • Marginal value to the buyer of intended use Economic Value • Are there other sources of value? • Option value • Intangibles Price
Balance Sheet Reserves Adequacy Run-off pattern Capitalization Taxes Assets Yields Market values Liquidity Income Statement Revenue (premium) Loss experience Expenses Expected expense savings Integration costs Cash flows Capitalization Taxes ValuationCritical Assumptions Cost of Capital • Target ROE • WACC
ValuationTotal Value • Value of the Balance Sheet $890 • Value of the Income Statement $60 • Other sources of value $50 • Total value $1,000 • Per Share (1) $20 • Ratios: • Value/Market Price (2) 111% • Value/Book (3) 111% • Value/Earnings (4) 18.0 • (1): Based on 50 million shares outstanding • (2): Current share price of $18 • (3): Book value is $900 million • (4): Pro-forma 2000 earnings are $56 million ($1.12/share)
Merger ConsequencesOverview and Critical Assumptions • Pro forma income statements and balance sheets of the buyer and the target combined, appropriately reflecting the deal structure • Key considerations • Transaction financing • Restructuring the balance sheet • Preferred stock • Outstanding options • Impaired assets • Transition costs • Conforming accounting • Impact on operating results • EPS • ROE • Constraints • RBC • Debt/Capital
Chart 1: Number of Deals vs. Statutory Surplus Source: Conning & Company
Chart 2: Number of Deals vs. P&C Index Source: Conning & Company
Chart 3: Aggregate Deal Size vs. P&C Index Source: Conning & Company
Chart 4: Average Deal Size vs. P&C Index Source: Conning & Company
Deal Pricing vs. P&C Index Not only is the quantity and size of deals impacted by relative stock prices, but evidence (albeit limited) shows that the price companies pay in a deal is also impacted by relative stock price… • Over the past three years, the price paid in a transaction versus earnings has followed the P&C index both up in 1998 and down in 1999. • Likewise, the price to book value has also followed the trend in the P&C index. Source: Conning & Company
Key Conclusions Our discussion of St. Paul’s valuation and merger consequences approaches, combined with our review of P&C merger and acquisition activity suggests the following… When market valuations are low: • sellers feel they are undervalued • buyers stock is generally of low value • future earnings are poor • premiums to market decline • fewer deals get done When market valuations are high • sellers feel the market has more appropriately valued their enterprise • buyers have additional currency in the form of stock • future earnings are better • premiums to market increase • more deals get done Said another way, when market valuation decline, insurers are not necessarily the bargains they appear to be.
