Allstate Corp.’s plan to pay $4 billion for National General Holdings Corp. and become a dominant player in the independent agency channel drew a positive response from S&P Global Ratings.
A few days after the M&A announcement, Standard & Poor’s affirmed its ‘A-‘ long-term issuer credit rating for Allstate as well as its ‘AA-‘ financial strength and long-term issuer credit ratings for Allstate’s core subsidiaries.
A stable outlook for Allstate and its subsidiaries remains in place.
The purchase will help Allstate grow its agency channel and presence in the nonstandard auto market, and S&P said that will be a very good thing.
“Allstate’s distribution has relied heavily on its exclusive agency channel for growth, mostly using independent agents for less densely populated regions. Additionally, the company has not had a significant presence in the nonstandard auto market, which is a growing area in the U.S.,” Standard & Poor’s said in its ratings assessment. “[National General] has a strong presence in both the independent agency channel and nonstandard auto business, which we believe will enhance Allstate’s market presence in the personal lines space.”
Another positive: S&P liked that the merger “will give Allstate a top-five presence in the independent agency channel, giving the company a strong platform to continue its transformative growth strategy.”
S&P noted that nonstandard auto has a very different risk profile than standard or preferred auto liability in terms of claims and pricing. With that in mind, it said the National General acquisition is a plus because Allstate will gain “a company that has a track record of success and a robust technological platform,” letting Allstate enter nonstandard markets without having to grow its presence from scratch.
Another merger benefit – an expectation that the combined company could boost capabilities and offer more products through the independent agency channel with an eye on middle market customers – something that hasn’t been National General’s primary focus. Additionally, Standard & Poor’s sees National General as helping to give Allstate diversified revenue streams “with its lender-placed and accident and health businesses, which Allstate will be able to leverage and further enhance.”
“The Allstate group is among the leaders in the market when it comes to its sophisticated pricing segmentation, product innovation, and claims-management processes,” Standard & Poor’s said in its assessment. “The company is quick to react to adverse trends, and its risk management processes help reduce underwriting volatility from uncertain events.”
Not everything is a positive, however. S&P notes that the cash deal will add “a sizeable amount of goodwill” to the combined company and increase financial leverage, but the ratings agency said it will be manageable and improve with time.
S&P predicts financial leverage will grow to 38 percent by the end of 2020, but hit the 33 percent to 35 percent range by the end of 2022.
Source: Standard & Poor’s