Soft Market Hammers Commercial Carriers’ Stocks; M&As Active in Personal Lines Sector

Stock Prices: The soft market continues to have an effect on insurers’ stock prices. With the inability of insurers to grow in the current market, commercial insurers’ stocks are still falling, down 18 percent year-to-date.

M&A Activity: On June 30, 2008, Allied World Assurance Co. Holdings Ltd (NYSE:AWH) and Darwin Professional Underwriters Inc. (NYSE:DR) announced a definitive merger agreement where Allied World will acquire Darwin. Darwin offers specialty and primary professional lines coverages, including a health care professional liability franchise and a strong niche errors and omissions division. Darwin also developed a business and technology model to underwrite small professional liability business, which is expected to complement Allied World’s large account, specialty insurance and reinsurance strategy. Shareholders of Darwin will receive approximately $550 million in cash, or $32.00 per share, in exchange for 100 percent of their interests in Darwin Professional Underwriters Inc. The purchase price represents a two times multiple on Darwin’s GAAP Equity and 13 times the firm’s trailing 12-months earnings.

Bermuda-based insurers/reinsurers were busy during the second quarter of 2008. Argo Group International Holdings Ltd. (Nasdaq:AGII) announced an offer to acquire Heritage Underwriting Agency Plc, a Lloyd’s insurer. The combination of Argo and Heritage will create a broader underwriting platform, with increased market presence, extended geographic reach and distribution network.

Also, in Bermuda, Enstar Group Limited (Nasdaq:ESGR) announced it reached an agreement with Goshawk Insurance Holdings Plc for a cash offer to be made by a wholly-owned subsidiary of Enstar. The offer values each share of Goshawk at 5.2 pence (US$0.103), or 45.7 million pounds Sterling (US$90.3 million) for all the issued shares of Goshawk in the aggregate. Goshawk owns Rosemont Reinsurance Limited, a Bermuda-based property and marine reinsurer that was placed into run-off in October 2005 following a significant decline in its capital base as a result of substantial catastrophe losses in 2004 and in 2005 from Hurricanes Katrina, Rita and Wilma.

Although commercial insurers experienced some M&A activity, personal lines insurers were extremely active during the second quarter. Liberty Mutual Group, one year removed from its $2.7 billion acquisition of commercial insurer Ohio Casualty Corp., announced it is acquiring Safeco Corp. (NYSE:SAF) for $6.2 billion. Upon completion of the transaction, Liberty Mutual will become the fifth largest property/casualty insurer in the United States. Currently, Liberty Mutual Group is the sixth largest P/C insurer, based on the company’s 2007 direct written premium of $20.2 billion, while Safeco had 2007 direct written premium of $5.9 billion.

In addition, other personal lines insurers such as Haulers Insurance Co. Inc., Great Lakes Casualty Insurance Co., and United Insurance Holdings were all acquired during the second quarter of 2008

Capital Raising: In May, Patriot Risk Management Inc. filed an S-1 for its proposed $115 million IPO. Patriot, through its subsidiary Guarantee Insurance Co., writes workers’ compensation insurance. In 2007, approximately 59 percent of the company’s total direct premiums were concentrated in Florida. Guarantee had $85.8 million in gross premiums written and net income of $2.3 million at 2007 year end.

LMC Capital LLC is a national investment banking firm focused exclusively on the insurance industry. Services include qualified, industry-specific advisory relating to mergers and acquisitions, capital raises and valuations. Phone: 704-943-2600. E-mail Info@LMCCapital.com. Web site: www.LMCCapital.com.

Topics Mergers & Acquisitions USA Carriers Commercial Lines Pricing Trends Reinsurance Market Professional Liability