What’s next for Arch after the surprising alliance deal? | Insurance business America
Since Arch is taking over Allianz’s medium-sized business, the turnaround is likely to be the focus
Insurance News
By Jen Frost
Rising interest rates are likely to give Arch a boost as it looks to expand its presence in the middle market and improve underwriting profitability on its upcoming Allianz acquisitions.
Arch’s $450 million donation on Friday to Allianz and U.S. MidCorp’s Fireman’s Fund Entertainment surprised market watchers. The retail-heavy push represents a “new venture” for the specialty insurer, Keefe, Bruyette & Woods managing director Meyer Shields told IBA.
Increasing competition with large commodity players will likely be key to profitable growth in the midmarket business, Shields said.
“The line between standard and specialty is very fluid, but one of the things that matters in retail assortment is size,” Shields said. “Not only do they compete with companies like Travelers and Hartford, but they also compete on scale [such as] Data, economies of scale, etc.
Arch/Allianz deal – getting underwriting profitability under control
The next steps for Arch after the deal closes include making the most of access to new lines. Also crucial is that it needs to “add the same kind of oversight that has transformed Arch’s own underwriting results and also expand that within some business areas,” Shields said.
Arch, which posted gross premiums of about $5.8 billion in North America last year, is aiming for a combined ratio (CR) in the low 90s for the new companies as a “long-term” goal. Reading between the lines, Shields anticipates this could take some time to achieve.
“When we looked at the slides that Arch put together, there was little mention of underwriting results other than to say that it would take some time to reach the low 90s – and low 90s should represent a decent level of overall return.” said Shields said. “But we assume that the numbers that companies aren’t telling you just don’t look very good – that’s the case [for us] here also.”
If the insurer’s strategy bears fruit, the price paid will likely represent good value, Shields noted. He added that Arch is poised to do “phenomenally well” with new additions, such as its mortgage insurance business.
What will Arch’s takeover of the Allianz companies bring?
According to an Arch presentation, companies purchased by Allianz include:
Allianz US Midcorp
The Allianz US MidCorp business acquired by Arch includes mid-market, program and umbrella and excess segments.
GPW from 2023: Around $1.48 billion (87% of total GPW will be acquired)
Middle market
- Standard commercial products for medium-sized companies
- Key Areas: Commercial Real Estate, General Liability, Commercial Auto
- Number of customers: 3,500+
- Average account size: $170,000
- Sales through: Retail brokers
programs
- Commercial insurance for small and medium-sized businesses
- Focus: General liability, commercial real estate, inland waterway transport
- Number of programs: 30+
- Distributed via: Various MGAs
Umbrella & Surplus
- The focus is on mono-liability placements for medium-sized companies
- Sales through: Regional, national, global and wholesale brokers
Entertainment
The alliance maintainsThe business acquired by Arch focuses on production reporting (film and television) and live entertainment reporting (shell and tours, theater, concerts, festivals, promoters).
GPW from 2023: Approximately $220 million (13% of total GPW acquired)
Investor reaction to the Arch-Allianz deal will be influenced by “competence” and bargaining environment
Together with the capital required to support the company, the total transaction value is $1.8 billion. The purchase, in which Arch was expected to pay Allianz $450 million in cash, was well received by investors. Parent company Arch Capital Group’s share price closed last Friday up 2.5%. Shields says this is a signal that investors have confidence in the business, but also speaks to the interest rate environment.
“It’s a reflection of competence that Arch honestly knows what they’re doing and will be able to make those changes,” Shields said. “As it happens, there is a lot of concern that the increase in property and casualty insurance rates is peaking, and that’s probably more or less true, but.” [they’re] still very convincing. This background makes it much easier to turn operations around if interest rates continue to rise.”
The deal gives Arch a faster path to mid-market growth
Arch expects the business expansions to generate $1.4 billion in annual earned premium, according to its acquisition slide. The mid-sized company has more than 3,500 customers with an average account size of $170,000.
Also included is a program segment with 30 programs delivered by Managing General Agent (MGA) partners. The MidCorp business has overhead and excess capacity spread across regional, national, global and wholesale levels.
The entertainment business focuses on production and live entertainment reporting. Of the two companies, it accounts for the smaller portion of the deal, representing about 13% of the acquired companies’ $1.7 billion in gross written premiums (GPW) in 2023.
It is expected that approximately 500 Allianz employees will join Arch upon completion of the transaction.
“The opportunity to acquire an established business, talented workforce and existing distribution relationships is a key driver of our interest,” Shulman told IBA in emailed comments.
Analysts praised the deal as positive for Allianz.
“In our view, this deal completes the sale of one of the few businesses where Allianz has historically struggled to maintain profitability,” Jefferies analyst Philip Kett said in a note last Friday.
Going forward, it will take time for Arch to define its appetite once the acquisition is complete. Given this, it is “too early to say” how the deal will impact customers and insurance brokers, Andrew Littlejohn, managing director of music, sport and entertainment at Higginbotham, told IBA.
Do you have any perspective on the insurance contract between Arch and Allianz? Leave a comment below.
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2024-04-11 15:15:13
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