Insurance Mergers: Many Buys, Scarce Financing

The only place to raise capital to make hay out of the bargains that AIG and other insurers are dishing up is the stock market, an M&A expert says.
David KatzNovember 25, 2008

It’s a commonly held truth about free-market capitalism that its potential to destroy some companies creates opportunities for others. While that may be true in the current financial crisis, the credit crunch has made it tough for the survivors to make hay out of such failures.

That may well be the case in the insurance industry, where the massive collapse of American International Group has forced the giant insurer to try to dump many of its still valuable corporate assets onto the trading block at bargain-basement prices. But because the sources of financing have just about dried up in the downturn, only companies with the heftiest balance sheets and the rare ability to raise capital by issuing stock are in a position to be taking advantage of the sale of assets by AIG and other insurers, says David Schieldrop, a managing director with Barclays Capital.

Speaking on mergers and acquisitions yesterday during an Ernst & Young webcast on the credit crisis and the global insurance industry, he said that in there’s “an unprecedented number of properties coming to market while valuations are under sever stress.” That represents “a once in a generation opportunity to obtain” high-quality insurance companies on the cheap, he said.

The price-to-earnings ratios and market capitalization of some of the nation’s most prominent insurance carriers have dropped precipitously over the last year, according to numbers Schieldrop provided from Factset, a provider of financial information. For example, estimated p/e ratio and market cap for the Hartford fell from 9.9 to 0.8 and from $33 billion to $0.8 billion, respectively, between June 1, 2007 and November 20 of this year. The Prudential (12.5 to 1.9 and $47 billion to $6 billion), the Principal Financial Group (14.1 to 2.5 and $16 billion to $2 billion), and Allstate have taken similar falls (8.9 to 3.4 and $38 billion to $10 billion).

But the big story in the industry, noted the Barclay’s merger specialist, is AIG. In October, the company’s chief executive, Ed Liddy, outlined plans to sell off chunks of the company to help pay back the $85 billion or so it has borrowed from the Fed, while holding onto AIG’s domestic property-casualty insurance operations and retaining a stake in its foreign life insurance companies. Liddy said then that he hopes to sell off AIG’s U.S. life insurance, annuity, and pension businesses to a single buyer, while divesting part of its non-U.S. life insurance operations.

No deals have been announced yet. But Reuters reported earlier this month that AIG is expected by the end of the year to reach deals to sell its U.S. personal lines business unit and Hartford Steam Boiler Inspection and Insurance Co.

In addition to AIG, many insurance companies will likely have units on the block either to raise money or to shed non-core assets, according to Schieldrop. But because of the low valuations, “there’s a lot less incentive to sell unless you really need to,” he said. “So the activity you’ll see over the next six to nine months [will involve] AIG and other distressed situations.”

At the same time, it’s become tough for potential buyers to find financing for such deals in the current capital markets, according the Barclay’s executive. Buyers of investment grade debt and convertibles have fled, he noted.

But it’s still possible to raise acquisition money by issuing common stock, albeit at hefty discounts, according to Schieldrop. “The equity market is the only market available to finance these transactions,” he noted.