U.S. Insurance M&A Review Stable M&A Environment Focused on Middle-Market Activity

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1 November 5, 2012 U.S. Insurance M&A Review Stable M&A Environment Focused on Middle-Market Activity George Johns John Butler John Hendrix Principal Managing Director Managing Director (212) (212) (212) U.S insurance M&A activity has remained fairly active in 2012, although the focus of activity shifted to the life insurance and insurance brokerage sectors and away from the property and casualty ( P&C ) sector. Run-off, private equity, and other financially motivated buyers are playing a more prominent role in M&A activity across the board as large, strategic acquirer s either remain on the sidelines or focus on acquisition opportunities o utside of the U.S. European and other non-u.s. insurers continue to play a very reduced role in driving overall transaction activity compared to prior years. U.S. deal activity to date in 2012 has been concentrated in middle -market transactions of less than $1 billion. In the first nine months of 2012, 206 insurance transactions were announced in the U.S. with an aggregate transaction value of $5 billion versus 273 transactions with an aggregate value of $5.8 billion in the first nine months of Robust transaction activity in the life insurance and insurance brokerage sect ors has been offset by a decline in the number and size of deals occurring in the P&C sector. Life insurance activity has increased in recent months as a result of additional divestiture activity and the involvement of non -traditional buyers. Acquisitions of life insurance companies constituted more than 50% of the aggregate announced transaction value in the first nine months of Six U.S. life insurance deals with a disclosed tr ansaction value of between $200 million and $650 million were announced during the second and third quarters. A total of $2.6 billion in life insurance transactions were announced in the first nine months of 2012, representing a 427% increase over the same period in Deal activity is robust in the perennially active insurance brokerage sector. The aggregate transaction value of insurance brokerage transactions in the first nine months of 2012 was greater than in each of the previous three years due to a few relatively large transactions. The total announced insurance brokerage deal value was $818 million through September 30, 2012 (excluding the recapitalization of AmWINS by New Mountain Capital, which did not have a disclosed transaction value), an increase from $442 million in the same period last year. The very active wholesale brokerage space included not only the AmWINS deal but also the sale of the life and P&C divisions of Crump Group,

2 Inc. to BB&T Insurance Services. Insurance brokerage continues to be the most active segment of the insurance M&A market in terms of the number of transactions. There were 165 insurance brokerage transactions announced in the first nine months of 2012, down from 205 in the first nine months of P&C transaction activity has been more limited and characterized by smaller transactions. Twenty-six U.S. P&C deals were announced in the first nine months of 2012, down from 51 in the same period in A total of $ 1.5 billion in P&C deals have been announced through September 30, 2012 versus $4.9 billion in the same period last year. All announced P&C transactions have had a deal value of less than $300 million, whereas three transactions with a deal value of $1 billion or more were announced in Recent P&C transaction activity has also focused on private companies, with only two announced acquisitions of U.S. listed companies this year, as compared to eight such transactions in 2011 and seven in Noteworthy M&A Themes Strategic Transactions. There have been few consolidation transactions in 2012 as strategic activity has focused on the expansion of specialty underwriting expertise, distribution capabilities, and geographic market presence. In June, Medmarc Insurance Group, a specialty liability insurer focused on medical products, announced a sale to ProAssurance Corporation through a sponsored demutualization transaction. Other recent examples include the acquisition of Permanent General, a non -standard auto insurer, by American Family Mutual Insurance Comp any; the acquisition of Family Heritage Life Insurance, a specialty individual supplemental health insurer, by Torchmark; and the acquisition of Hardy Underwriting Bermuda, a Bermuda domiciled Lloyd s company, by CNA Financial. Strategic activity in the life insurance sector has been driven by non-u.s. insurance carriers continuing to reassess their commitment to the U.S. market in response to their evolving regulatory and accounting framework s and the withdrawal of U.S. insurance carriers from specific lines of business. This activity has taken the form of both acquisitions of legal entities and reinsurance transactions. Examples of divestitures by non-u.s. insurance carriers include the sale of the U.S. fixed annuity business of Industrial Alliance Insura nce, through a reinsurance transaction, to Guggenheim Capital; and the assumption by Reinsurance Group of America, through a 90% coinsurance transaction, of a $6 billion fixed deferred annuity block from John Hancock, a subsidiary of Manulife Financial Corp. The restructuring of The Hartford resulted in a number of transactions, including the acquisition by Massachusetts Mutual Life Insurance Co. of its retirement plans business; and the acquisition by Prudential Financial of its individual life insurance business. 2

3 Run-off Transactions. W ith continued challenging conditions in the P&C and life sectors, run-off specialists have played a prominent role in the M&A market. In August, Enstar Group announced the acquisition of SeaBright Holdings, a publicly traded workers compensation insurer, representing the first buyout of an actively writing, publicly traded company by a run-off specialist. Bermudabased Enstar Group also announced the acquisition of HSBC Holdings U.S. and Canadian life insurance companies i n September. In the life and annuity sector, non-traditional buyers have been active acquirers of annuity businesses and closed annuity blocks in order to increase assets under management and achieve operating efficiencies. These buyers have the ability to redeploy invested assets in more aggressive portfolio management strategies, to reduce operating expenses, and to achieve capital and tax advantages from offshore domiciles. In July, Athene Group announced the acquisition of Presidential Life Corporation, representing the first sale of an independent, publicly traded U.S. life and annuity company since January Examples of other closed block oriented life and annuity transactions include the acquisition by Jackson National Life Insurance Co., a subsi diary of Prudential Plc, of Reassure America Life Insurance Co., from Swiss Re; and the previously mentioned acquisition of Industrial Alliance Insurance s U.S. fixed annuity business by Guggenheim Capital. Private Equity Activity. Private equity firms have continued to play a central role in the insurance M&A market and have been active deal participants in 2012, both as buyers and sellers. Private equity-led transaction activity has taken all forms, including the monetization of previous investments, new investments, and add-on acquisitions through existing portfolio companies. A number of transactions have provided total or partial monetization events for earlier investments by private equity firms. The previously mentioned Crump Group transaction provided a partial realization of the investment made by J.C. Flowers & Co. Other recently announced transactions involving private equity portfolio companies include the previously discussed recapitalization of AmWINS, a portfolio company of the Parthenon Gr oup; the recapitalization of Cunningham Lindsay, a portfolio company of Stone Point Capital, by CVC Capital Partners; the sale of Permanent General, a portfolio company of Capital Z Partners, to American Family Mutual Insurance Co. ; the sale of GeoVera Insurance Group, a portfolio company of Fri edman Fleischer & Lowe and Hellman & Friedman, to Flexpoint Ford; and the sale of the Bermuda-based insurance and reinsurance operations of Ariel Holdings, which is owned by a consortium of several private equity fir ms, to Goldman Sachs. The largest acquisition announced by a private equity -backed company was the previously mentioned acquisition of Presidential Life by Athene Group, a portfolio company of Apollo Global Management. Private equity-backed companies also continued to be active acquirers in the insurance brokerage 3

4 sector. Private equity-backed insurance brokers and agencies, including Ascension Insurance Agency (Century Capital and Parthenon Capital Partners), AssuredPartners (GTCR), Bollinger (Evercore Partners), Confie Seguros (Genstar Capital), Hub International (Apax Partners and Morgan Stanley), and USI Insurance Services (Goldman Sachs) each announced multiple acquisitions in These six firms accounted for 40, or 24%, of the 165 insurance brokerage transactions announced in the first nine months of this year. Anticipated Trends We expect insurance transactions to continue at the current level of deal activity. W ith large insurance carriers focused on international expansion and organic growth opportunities, we do not anticipate a notable increase in largescale merger activity. Instead, we anticipate that P&C and life insurance carriers will continue to focus their U.S. acquisition efforts on expanding specialty underwriting and distribution ca pabilities. As a result, middle-market specialty insurance carriers and managing general agents ( MGAs ) are likely to be strategic acquisition targets. Insurance carriers challenged by market conditions, underwriting performance, or rating agency pressures will continue to solicit interest from run -off specialists, non-traditional buyers, and other financially motivated buyers. We expect the ongoing retreat from the U.S. market to lead to further divestitures, particularly in the life insurance sector. W e also expect to see shareholder activism play a central role in driving public insurance company M&A activity in these sectors, continuing a trend that began in The life cycle of private equity fundraising implies that private equity firms will be active buyers and sellers of U.S. insurance companies. The significant acquisition activity in the sector from 2005 through 2008 suggests that private equity investors will continue to be sellers in 2013, particularly of insurance brokers. With the availability of debt financing at attractive terms, as well as the lim ited capital requir ements and lack of rating agency risk associated with non - underwriting businesses, we expect private equity firms will also continue to be active acquirers of insurance brokers and other insurance services businesses. 4

5 M&A Financial Advisors - U.S. P&C, Life and Insurance Broker Transactions Year to Date (October 31, 2012) Total Transaction Number of Value Rank Firm Transactions ($mm) 1 Goldman, Sachs & Co. 6 $1, ,411 3 Perella Weinberg Partners LP 2 1,236 4 Morgan Stanley 2 1,185 5 Greenhill & Co., Inc. 2 1,015 6 Evercore Partners Inc Deutsche Bank Securities Inc J.P. Morgan Securities LLC Aon Benfield Securities, Inc Barclays Capital Inc Source: SNL Financial Sandler O Neill is proud to have advised or raised capital for the following insurance companies in 2012: has agreed to acquire has announced its sale to has announced its sale to has announced its sale to $23 Million $250 Million $414 Million $154 Million October 3, 2012 May 4, 2012 April 2, 2012 Series B Preferred Stock $21 Million has been acquired by has sold its Life and Property and Casualty Operating Divisions to $570 Million 5

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