Commercial lines carriers continue to impress; M&A activity up slightly

Stock Prices: Commercial lines stocks advanced for the second consecutive two-month period, up 5 percent for November/December, compared to a 7 percent increase in September/October. Companies continue to impress despite increased competition and catastrophe losses. With the exception of St. Paul Travelers, all companies’ shares were in the black. St. Paul announced a preliminary $220 million after-tax loss from Wilma, in addition to previously announced after-tax losses of over $1 billion from Katrina and Rita. Chubb Corporation’s stock led the sector, up 6 percent for the two month period. Chubb announced the completion of the Harbor Point transaction, where it shed its reinsurance business and became a 16 percent equity owner in the new global reinsurance company, Harbor Point Limited. Chubb expects the transaction to result in a pre-tax gain of approximately $200 million ($168 million will be recognized in the fourth quarter of 2005). In addition, the company also announced a regular quarterly dividend of $0.43 per share and authorized a share repurchase program of up to 14 million shares of the company’s common stock. Overall, commercial lines stocks are performing well and are trading at 95 percent of their 52-week high.

Valuation Multiples: Multiples continue to edge up in the sector. At the end of December, commercial lines shares were trading at a price of 1.35 times GAAP book value compared to 1.19 at the end of August and 1.31 at the end of October. P/E multiples are expanding at a slightly higher pace. Commercial lines stocks were trading at 13.34 times 2005 earnings estimates at the end of October compared to 14.06 times at the end of December.

M&A Activity: Activity was up slightly during November/December with 10 deals announced, compared to seven announced in September and October. Alea announced three divestitures in the form of renewal rights transactions. The largest deal occurred on Nov. 18, when Swiss Re announced it had agreed to acquire GE Insurance Solutions, the fifth largest global reinsurer, for $6.8 billion, subject to closing adjustments. This represents 76 percent of the approximate $8.9 billion U.S. GAAP book value (before additional reserves), of the businesses to be acquired. In connection with the transaction, Swiss Re plans to raise up to $7.5 billion in new capital. Post-transaction, GE is expected to hold in excess of 10 percent of Swiss Re shares. Closing is expected to occur by mid 2006.

Raising Capital: Companies continue to raise capital after record losses from the 2005 Hurricane season. During November/ December, property and casualty insurers and reinsurers raised or made plans to raise over $11 billion in new capital, down slightly from the September and October number of approximately $14 billion. Several start-up reinsurers were formed in the aftermath of the U.S. hurricane season. Omega Underwriting Holdings PLC ($156.7mm of outside capital), Hiscox Bermuda ($296.5mm), New Castle Reinsurance Co. Ltd. ($500mm), Lancashire ($1 billion) all announced capital raises to begin business operations in time for Jan. 1, 2006 renewal season.

LMC Capital LLC is a national investment banking firm focused exclusively on the insurance industry. The firm can be contacted at (704) 943-2600, by e-mail at Info@LMCCapital.com or visit the firm’s Web site at www.LMCCapital.com.

Topics Mergers & Acquisitions Carriers Commercial Lines Business Insurance Reinsurance