American Financial Group has agreed to buy Summit Holdings Southeast Inc. and its related companies from Liberty Mutual Insurance in an all-cash transaction valued at $250 million.
Based in Lakeland, Fla., Summit sells workers compensation in the Southeast and has approximately $520 million of premium written.
Following the transaction, Summit will continue to operate under the Summit brand as a member of AFG’s Great American Insurance Group, according to the announcement.
Under the terms of the transaction, Cincinnati-based AFG will pay Liberty Mutual an estimated $250 million at closing. The purchase price will be subject to adjustment between signing and closing for, among other things, changes in Summit’s GAAP tangible book value.
During a conference call Thursday, AFG Co-CEO Carl Lindner III noted that Summit’s Southeast presence (in Florida, in particular) complements his company’s existing workers’ compensation specialty companies—Republic Indemnity, which is focused in California, and Strategic Comp, a regionally focused comp writer in several states.
The deal also “adds $1 billion of cash to our balance sheet, which we will put to work in our investment portfolio,” he added. Lindner noted that AFG’s in-house money manager has produced returns that outperform the industry and major indices.
The transaction also makes use of $400 million out of $900 million of excess capital that AFG reported at Sept. 30, 2013, he said.
“We expect to achieve double-digit returns on capital in this business and have immediate earnings accretion,” he said, also going on to discuss AFG’s past ability to “skillfully manage the workers comp cycle”—growing when market conditions are right and walking away from business when it’s not possible to achieve appropriate returns.
Currently, “with pricing on the upswing” and rates adequate in the carrier’s target markets, “AFG is back to growing its workers comp business,” Lindner said.
Later in the call, Lindner said other benefits of the deal for AFG relate to Summit’s use of predictive analytics and its approach to managing healthcare claims.
Summit’s affiliates include:
Lindner noted that Summit has a top-5 market position in the workers comp line in several states, including Florida, Louisiana and Mississippi, even though average premium sizes are less than $10,000 for the majority of the business.
Following the announcement, rating agency A.M. Best issued a comment referencing AFG’s total capital investment in Summit of approximately $400 million, including the capital contribution at closing.
A.M. Best said the issuer credit rating (ICR) of “bbb+” and all debt ratings of AFG are unchanged. In addition, A.M. Best said the financial strength rating of “A” (Excellent) and ICRs of “a” for Summit subsidiaries Bridgefield Employers Insurance and Bridgefield Casualty Insurance Co. also are unchanged.
The rating agency said the transaction has no effect on AFG’s financial leverage measures as no external financing is utilized. AFG’s total debt-to-total capital and interest coverage ratios remain within A.M. Best’s guidelines for its current ratings. AFG has no material debt maturing until 2019, further benefiting its liquidity position, according to A.M. Best.
During the conference call, CFO Jeff Consolino explained that the reason for adding capital, noting that when Summit was a part of Liberty, it participated in an intercompany pooling arrangement (ceding premiums and losses to Liberty Mutual). That meant the Summit group did not maintain a standalone rating. The $400 million is enough to give Summit a standalone capital base appropriate for an A+ rating from Standard & Poor’s, equivalent to AFG’s other operating insurers, he said.
Through its Great American Insurance Group, AFG sells specialized commercial property/casualty insurance products as well as annuities. Its major product lines include inland and ocean marine, workers compensation, agricultural-related products including crop insurance, executive and professional liability, fidelity and surety, collateral protection, umbrella and excess liability, excess and surplus, and commercial automobile. The group writes business in all 50 states primarily through independent agents and brokers.
With the Summit acquisition, the specialty casualty component of the business will grow from 34 percent to 41 percent, Lindner said. While specialty property will still be the biggest part of the pie, that will shrink from 53 percent down to 47 percent, with specialty financial making up the remaining 12 percent.
Bank of America Merrill Lynch acted as financial advisor to Liberty Mutual Insurance.