Fleeing taxes, U.S. insurers sell to foreign owners
"Every insurer" is thinking about mergers and acquisitions now, after three recent blockbuster merger proposals, says analyst Paul Newsome, in a report to clients of New York brokerage Sandler O'Neill + Partners:
- Ace Ltd. (Switzerland) plans to spend $28 billion for Chubb (Warren, N.J.) Global property insurer Ace's biggest employment center, with 2,500 workers, is the Philadelphia area, but the North American operations based here are being combined with Chubb's, as Ace plans to cut $650 million in yearly expenses to help make the deal pay.
- Willis Group (Ireland/U.K.), the insurance brokerage giant (Chicago's ex-Sears Tower is its US HQ), has agreed to pay $18 billion for business consultants Towers Watson (Arlington, Va.), which employs 1,000 in Philadelphia and Mount Laurel. Oddly, Willis is paying less than Towers Watson's market value. Willis plans to cut $100 million to $125 million in expenses.
- Tokio Marine (Japan), which owns Philadelphia Insurance Cos., Bala Cynwyd, agreed to pay $7.5 billion for HCC Insurance Holdings Inc., Houston.
What's up? Slow growth is pushing ambitious CEOs to acquire; the Fed's cheap-money policy makes deals easy to finance, while it lasts; and "the tax rate of the surviving company is an important consideration," writes Newsome.
In each case, "the combined company will ikely pay a lower effective tax rate" -- by moving U.S. operations into foreign tax and legal jurisdictions. So pending deals "will increasingly be between companeis that have a non-U.S. domicile and those that have a U.S. domicile."
How eager are U.S. companies for cheaper foreign tax rates? Towers Watson has agreed to a share price lower than its recent trading level; and to be the acquiree, even though its CEO is taking over, and it's worth more than the company that is nominally buying it.
These companies are also "building global scale," and crossing insurance, benefits, large and medium sized clients, and other complementary services, in a bid to build sales, Newsome adds. He called Ace's offer for Chubb "very reasonable" at just 140% of book value; insurer deals have closed at 200%, he notes.
Who's next? Newsome writes that Allstate, AIG, AON, Marsh McLennan and Travelers are all big enough to buy other companies; AIG (again), Cincinnati Financial, Kemper, Navigators, ProAssurance, Progressive and XL Group are likely takeover targets.
These mergers are no slam-dunk, warns S&P credit analyst Tracy Dolin. In a report to clients, Dolin warns S&P is putting Ace and Chubb on "negative outlook," predicting a "one-in-three likelihood" the merger will face "integration difficulties" that will keep them from putting aside enough cash to keep a AAA rating.
The Ace-Chubb deal is "a game-changer," says analyst Larry Greenberg, in a report to clients of Janney Capital Markets. Ace shares actually rose in trading yesterday after the merger was announced -- rare for acquirers.
Greenberg warned prospective merger partners tend to make "mushy" predictions of benefits that don't always work out. But with property insurers facing tough competition from well-financed investment banks, digital technologies, cheap money and U.S. taxes, pressure to merge will spread. He rates Ace "buy."