Chicago-based insurer Kemper Corp. has agreed to acquire Birmingham-based Infinity Property and Casualty Corp. in a cash and stock transaction valued at approximately $1.4 billion, or $129.00 per share, creating an insurer with increased scale in the nonstandard auto insurance market.
Infinity sells auto insurance in the specialty, nonstandard segment. It has approximately $1.4 billion in 2017 direct written premiums, 88 percent of which is nonstandard auto and the rest commercial vehicle and classic car business. For 2017, it reported operating net income of $44 million a combined ratio of 95.2. Slightly more than half (53 percent) of its business is in California, 31 percent in Florida, 12 percent in Texas and two percent in Arizona. Infinity has 2,300 employees and 10,600 independent agents. One of its target markets is the Hispanic community and many of its employees are bilingual.
The combined company will have a more diversified portfolio across auto, home, life, and health insurance with approximately $2.2 billion in nonstandard auto insurance premiums, more agency relationships and greater efficiencies, according to the parties. Kemper companies offer insurance for home, auto, life, health and valuables and is represented by 20,000 agents and brokers and employs 5,550 associates (2,000 of them in property/casualty).
The companies say there is limited overlap in their agency forces and their products are complementary.
Kemper also sees an opportunity to life, health and renters products to Infinity customers.
“This compelling transaction combines two well-known brands with complementary strengths and cultures to form a leader in nonstandard auto insurance, and enhances Kemper’s overall growth opportunities, diversification, financial strength, and ability to serve policyholders,” said Joseph P. Lacher Jr., Kemper president and chief executive officer.
Infinity CEO Glen N. Godwin added that Infinity shareholders will “benefit from immediate and certain value for their shares as well as the opportunity to participate in the significant upside potential of the combined company.”
After completion of the transaction, Infinity’s senior management team will be integrated into the newly-combined organization. Additionally, at closing, Kemper will increase its current board of directors by one seat and select a director from Infinity to join the Kemper board of directors.
The deal is expected to result in annual pre-tax cost savings of approximately $55 million, and an additional $5 to $10 million of pre-tax earnings resulting from the repositioning of Infinity’s investment portfolio. These are expected to be fully phased in by the end of the second year following close. The cost savings are expected to be achieved through the “consolidation of redundant corporate functions and the optimization of the combined company’s systems, business processes and reinsurance programs.”
The announcement did not say what, if any, relocations or employee cutbacks would result.
Kemper held a conference call for Wednesday morning at which officials addressed the Infinity deal as well as its fourth quarter results. Excluding catastrophe losses, Kemper booked $37 million in net income during its 2017 fourth quarter. Catastrophe losses wiped out $33 million of that, however. Kemper’s combined ratio for Q4 was 104.7 versus 103.3 over the same period in 2016.
Kemper reported $120.9 million in net income for 2017 with catastrophe losses factored out. Catastrophe losses and other loss adjustments wiped out $120.2 million of that total. Kemper’s combined ratio for 2017 was 105.6, on par with 2016.
Earned premiums increased $45 million, or eight percent, in the quarter and $130 million, or six percent, in the year; improvements were primarily from policies-in-force growth and higher average earned premium in the nonstandard auto business. Nonstandard auto led the P’C segment’s underlying combined ratio improvement of 6.3 percentage points in the quarter and 5.5 percentage points in the year.
Kemper said it recognized $7.4 million benefit from the Tax Cuts and Jobs Act of 2017.
Kemper said it will fund the cash portion of the Infinity deal with a combination of cash on hand from the combined companies and other internal resources. The transaction is expected to close in the third quarter of 2018.
The nonstandard auto insurance market has been having difficult time for almost a decade and especially in the past several years. Loss ratios and operating ratios for the U.S. nonstandard auto insurance market fell to their worst levels in a decade in 2016, according to A.M. Best. The loss and loss adjustment expense ratio for the segment was 78.4 in 2015 and 81.1 in 2016.
The exact size of the nonstandard auto market is hard to determine. According to Conning Research & Consulting’s “Personal Lines Consumer Markets Annual” report published in late 2014, it could range from $33 billion to $40 billion in annual premium or about 30 to 40 percent of the total private passenger auto insurance market.
The nonstandard auto industry is highly concentrated geographically. Three states – Texas, California and Florida – accounted for 59 percent of all direct premiums written in 2013, according to an A.M. Best report. But, according to the report, no carrier writes more than 10 percent of the market and most companies have market shares of less than two percent.
Several major carriers including GEICO, Progressive, Farmers and American Family’s The General insure nonstandard drivers. Nationwide exited the nonstandard personal and commercial auto business as of January 2017 in a deal in which it turned over its renewal rights to National General.
Other companies in the nonstandard market in addition to Infinity are Access, Affirmative, Dairyland and Gainsco.