What’s next for Arch after surprise Allianz deal?
What’s next for Arch after surprise Allianz deal? | Insurance Business America
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What’s next for Arch after surprise Allianz deal?
Turnaround likely top of mind as Arch takes on Allianz middle-market business
Insurance News
By
Jen Frost
Rising rates are expected to serve as a boost for Arch as it looks to build on its middle-market presence and tackle underwriting profitability at its impending Allianz acquisitions.
Arch’s Friday $450 million swoop for Allianz’s Fireman’s Fund entertainment and US MidCorp businesses surprised market watchers. The retail-heavy push represents a “new venture” for the specialty-heavy insurer, Meyer Shields, Keefe, Bruyette & Woods managing director, told IBA.
Ramping up to compete with big standard players will likely be key to profitably growing the middle-market business, Shields said.
“The line between the standard and specialty is very fuzzy but one of the things that’s important in the retail line is scale,” said Shields. “You’re not only competing with companies like Travelers and Hartford, but you are competing with them on scale matters [such as] data, the economies of scale, and so on.”
Arch/Allianz deal – getting to grips with underwriting profitability
Next steps for Arch once the deal is done will include making the most of access to new lines. Critically, it will also need to “add the same sort of oversight that turned around Arch’s own insurance results and develop that within a few business lines as well”, Shields said.
Arch, which wrote around $5.8 billion of gross premium in North America last year, has targeted a “long-term” target of a low 90s combined ratio (CR) for the incoming entities. Reading between the lines, Shields anticipated this could take some time to achieve.
“When we looked at the slide deck that Arch had put together, there was not much mention of underwriting results, other than saying that would take time to get to the low 90s – and low 90s should be decent level of overall return,” Shields said. “But we work under the assumption that what companies don’t tell you, those figures simply don’t look very good – that’s the case [for us] here as well.”
If the insurer’s strategy bears fruit, the price paid is likely to represent good value, Shields noted. He added that Arch has form for doing “phenomenally well” with new entries, such as its mortgage insurance play.
What does Arch’s Allianz businesses acquisition bring to the table?
As per an Arch presentation, the businesses being bought from Allianz include:
Allianz US Midcorp
The Allianz US MidCorp business being acquired by Arch includes middle-market, program and umbrella & excess segments.
GPW as of 2023: Around $1.48 billion (87% of total GPW being acquired)
Middle Market
Standard Commercial products for mid-size businesses
Key lines: Commercial property, general liability, commercial auto
Client count: 3,500+
Average account size: $170,000
Distributed via: Retail brokers
Programs
Commercial insurance for small and mid-sized businesses
Key lines: General liability, commercial property, inland marine
Program count: 30+
Distributed via: Various MGAs
Umbrella & Excess
Mid-sized business monoliability placements focus
Distributed via: Regional, national, global and wholesale brokers
Entertainment
The Allianz entertainment business being acquired by Arch has a focus on production coverage (film and TV) and live entertainment coverage (shell and touring, theater, concerts, festivals, event promoters).
GPW as of 2023: Around $220 million (13% of total GPW being acquired)
Investor reaction to Arch and Allianz deal influenced by “competence” and rate environment
Wrapping in capital required to support the business, the total transaction value stands at $1.8 billion. The purchase, expected to see Arch pay a $450 million cash consideration to Allianz, resonated well with investors. Parent Arch Capital Group’s share price closed up 2.5% last Friday. As per Shields, it’s a signal that investors have confidence in the business but also speaks to the rate environment.
“It’s a reflection of competence, that Arch frankly knows what they’re doing and will be able to make these changes,” Shields said. “It so happens that there’s a lot of concern about property & casualty rate increases peaking, and that’s probably more or less accurate, but [they’re] still very compelling. That backdrop makes it so much easier to turn operations around when rates are still rising.”
Deal gives Arch a faster route to middle-market growth
Arch is anticipating the business additions will deliver annual earned premium of $1.4 billion, according to its acquisition slide deck. The middle-market business has more than 3,500 clients with an average account size of $170,000.
Also wrapped in is a program segment with 30 programs run through managing general agent (MGA) partners. The MidCorp business has umbrella & excess capabilities, distributed at regional, national, global and wholesale levels.
The entertainment business’s focus is on production and live entertainment coverage. Of the two firms, it accounts for the smaller chunk of the deal, representing approximately 13% of the acquired businesses’ $1.7 billion 2023 gross premium written (GPW).
Around 500 Allianz employees are expected to join Arch on the deal’s close.
“The opportunity to acquire an established business, talented workforce and the existing distribution relationships is a key driver of our interest,” Shulman told IBA in emailed comments.
The deal was hailed as a positive for Allianz by analysts.
“From our perspective, this deal completes the disposal of one of the few businesses that Allianz has historically struggled to sustain profitability in,” Jefferies analyst Philip Kett said in a note last Friday.
Moving forward, it will take some time for Arch to define its appetite once the acquisition closes. Given this, it is “too early to tell” how the deal will affect clients and insurance brokers, Andrew Littlejohn, Higginbotham managing director of music, sports & entertainment practice leader, told IBA.
Got a perspective on the Arch and Allianz insurance deal? Leave a comment below.
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