Commercial Lines Insurance Premium Finance• Financial sponsors are aggressively targeting...
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Colonnade Advisors LLC • 500 West Madison Street • Suite 3410 • Chicago IL • 60661 www.coladv.com Investment banking services provided through Colonnade Securities LLC, member FINRA and INSURANCE PREMIUM FINANCE Market Commentary – November 2019 1 Commercial Lines Insurance Premium Finance Shifting market share in a growing commercial loan segment As we reported in our April 2015 industry commentary, insurance premium finance is a well- established, high margin, high growth commercial lending activity that generates low credit quality costs. We estimate the commercial segment has increased to roughly $35 billion of annual originations. Much has transpired in the insurance premium finance industry since our last report. Two large banks have divested their top five premium finance units, totaling more than $2 billion of portfolio, in both cases to consolidators. Two banks have entered the industry through acquisition and another de novo. New entrant banks continue to demonstrate their ability to expand premium finance originations rapidly utilizing their low cost balance sheets. Banks no longer lead the industry, however, controlling just under half of all commercial lines originations and one-third of the overall market. The market has shifted since 2013, when banks controlled nearly 60% of the commercial segment. Independents now control a slight majority of originations. New entrant banks and an increasing universe of financial sponsors remain interested in the sector and are actively seeking entry through acquisition of an established platform. While we do not anticipate any significant divestitures from the large players in the foreseeable future, absent an exogenous event, several rapidly growing mid-sized players are emerging. Continued acquisition interest across a small pool of possible targets creates scarcity value for any premium finance company of size considering coming to market, buoying valuations. Current Market Trends • Banks are liquid and need earning assets. The regulatory environment has calmed, and banks are seeking acquisitions of specialty finance businesses. • Many banks are interested in insurance premium finance due to the attractiveness of the asset class and the success of BB&T, Wintrust, Texas Capital Bancshares, Ameris Bank, Meta Bank and others. Colonnade regularly receives inquiries from banks seeking an insurance premium finance platform. • Financial sponsors are aggressively targeting specialty finance companies, particularly now that banks have returned as long-term buyers. Insurance premium finance is always of interest. • Massive consolidation in the insurance premium finance industry has left few platform acquisition opportunities for banks seeking to enter the business. • Few premium finance companies of size remain; fewer come to market with any regularity. Scarcity value in a transaction plays to a seller’s benefit.
Transcript of Commercial Lines Insurance Premium Finance• Financial sponsors are aggressively targeting...
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CommercialLinesInsurancePremiumFinance
ShiftingmarketshareinagrowingcommercialloansegmentAs we reported in our April 2015 industry commentary, insurance premium finance is a well-established,highmargin,highgrowthcommercial lendingactivitythatgenerateslowcreditqualitycosts. We estimate the commercial segment has increased to roughly $35 billion of annualoriginations.Much has transpired in the insurance premium finance industry since our last report. Two largebankshavedivestedtheirtopfivepremiumfinanceunits,totalingmorethan$2billionofportfolio,inbothcasestoconsolidators.Twobankshaveenteredtheindustrythroughacquisitionandanotherdenovo. New entrant banks continue to demonstrate their ability to expand premium financeoriginationsrapidlyutilizingtheirlowcostbalancesheets.Banks no longer lead the industry, however, controlling just under half of all commercial linesoriginations and one-third of the overallmarket. Themarket has shifted since 2013, when bankscontrolled nearly 60% of the commercial segment. Independents now control a slightmajority oforiginations.Newentrantbanksandanincreasinguniverseoffinancialsponsorsremaininterestedinthesectorand are actively seeking entry through acquisition of an established platform. While we do notanticipate any significant divestitures from the large players in the foreseeable future, absent anexogenous event, several rapidly growing mid-sized players are emerging. Continued acquisitioninterest across a small pool of possible targets creates scarcity value for any premium financecompanyofsizeconsideringcomingtomarket,buoyingvaluations.CurrentMarketTrends
• Banksareliquidandneedearningassets.Theregulatoryenvironmenthascalmed,andbanksareseekingacquisitionsofspecialtyfinancebusinesses.
• ManybanksareinterestedininsurancepremiumfinanceduetotheattractivenessoftheassetclassandthesuccessofBB&T,Wintrust,TexasCapitalBancshares,AmerisBank,MetaBankandothers.Colonnaderegularlyreceivesinquiriesfrombanksseekinganinsurancepremiumfinanceplatform.
• Financialsponsorsareaggressivelytargetingspecialtyfinancecompanies,particularlynowthatbankshavereturnedaslong-termbuyers.Insurancepremiumfinanceisalwaysofinterest.
• Massiveconsolidationintheinsurancepremiumfinanceindustryhasleftfewplatformacquisitionopportunitiesforbanksseekingtoenterthebusiness.
• Fewpremiumfinancecompaniesofsizeremain;fewercometomarketwithanyregularity.Scarcityvalueinatransactionplaystoaseller’sbenefit.
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LargebutconcentratedmarketGrowth in commercial lines property and casualty premiums continues to drive the insurancepremium finance market. Operating conditions have been favorable, despite the intense focus ongrowthandmarketshareamongmanyofthelargerplayers.AstrongU.S.economyhascontributedtoincreasedlevelsofP&Cinsurancecoverage.Thepasttwoyearsofhigherabsolutelevelsofinterestratesgenerallyhaveincreasedtheuseofpremiumfinancing,too,asbusinesseshavealternativeusesforcash.Weestimatethecommercialsegmenthasincreasedto$35billionofannualoriginations.Thetopfiveplayerscontrolanestimated50%oftheoverallmarketand75%ofallcommerciallinesoriginations;thetoptencontrol60%oftheoverallindustry.Theinsurancepremiumfinanceindustryisrelativelyconcentrated;butthesmallandmid-sizesegments,inparticular,stillofferopportunitiesforgrowth.Bank-owned premium finance companies have largely shed their personal lines portfolios, due tostringent consumer-facing regulations, allowing independents to increase volumes in this highmarginsegment.IndependentsleadcommercialloanvolumesagainWhen Colonnade started tracking the industry in 2001, independents controlled themarket. Onlyfourof the largestplayers in2001werebank-owned;mostotherswere funded in the commercialpaper conduit market. Of the dozen largest players at the time, all but three have since beenconsolidated.Between2001and2013,adozenbanksenteredthe industry,andseveralproperties tradedhandsduring the financial crisis. By the end of 2013, the tables had turned, and banks controlled anestimated60%ofthecommercialsegment.
Shiftingmarketshareofcommerciallinesinsurancepremiumfinanceoriginations
Following several keyM&A transactions and bank divestitures over the past five years, however,banksno longercontrol themajorityofcommercial linespremiumfinancing.Sinceour lastreport,IPFS acquired Premium Assignment Corp (PAC), a top five player, from SunTrust in late 2017,shifting nearly $3 billion of originations from bank-owned to independent. That cemented IPFS’position as the largest player in the industry, having completed roughly 30 acquisitions sinceinceptioninthe1990s.IPFS’acquisitionofPACwassignificant,aswasitsacquisitionofAICCO’s$1.5billionportfoliofromAIGduringthefinancialcrisis.
2001$18billion
2013$30billion
2018$35billion
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Wells Fargo,which entered the industry through its platform acquisition in 2007, sold Flatiron toBB&T’s AFCO in mid-2016, shifting roughly $2 billion of originations. AFCO ranks number twooverallandhasbeenaggressiveonlargerdealsovertheyears,havingpurchasedtheU.S.operationsofCananwill,anothersignificantplayer,fromAonin2008.Interestingly,SunTrust–whichrecentlysoldPAC–hasagreedtomergewithBB&T.RationaleforbankownershipBanksremainenamoredwith thecharacteristicsof theassetclass,whichcreatesadeepmarketofinterestedbankbuyers.Banks’ interestalsogeneratesopportunities for financialsponsors tobuildsignificantplatformsforsaletobanksultimately.
Shortdurationassets • Loanstypicallyhaveanine-toten-monthterm,andportfolioshaveanaveragelifeoffivemonths,withprincipalamortizingthroughouttheloan
Minimalcreditlosses
• Premiumfinancecompaniesrelyonthestrengthoftheinsurancecarrierbackingtheunderlyinginsurancepolicyascollateral.Commerciallinespremiumfinancecompaniestypicallyaverageannualnetlossesontheorderof10bps-30bps
Attractiveloanspreads • LoansaregenerallypricedasaspreadoverPrime• Short-term,fixedrateloansre-pricedeverynineortenmonths
Increasedfeeincome • Feeincomederivedfrompremiumfinanceactivitiestypicallycanreach15%to20%ofgrossrevenueor1%to2%ofearningassets
Growthinunitvolume • Anindirectoriginationstrategyleveragesafinancecompany’sdirectsalesforce.Highefficiencyandnumberofloansperemployee
Diversificationofassetsandearnings
• Premiumfinanceloansdiversifybanks’commercialloancategories• Loanstoinsuredborrowerswith$1millionorlessinrevenuecouldcount
towardsCRArequirements
HighROAandROE• Highyieldsandlowlossescoupledwithastrongefficiencyratioandoperating
leveragegeneratesuperiorreturnsonassetsandequity,wellaboveotherbankproducts
Competitiveadvantageviabanks’accesstocapitalandlowcostoffunds
• Bank-ownedpremiumfinancecompaniesmaintainacompetitivefundingadvantagerelativetoindependentoperators
NewentrantsdemonstrategrowthSeveral banks have recently entered the industry through acquisition: Ameris Bank acquired USPremium Finance in late 2016, andMeta Bank acquired AFS/IBEX in late 2014. Both banks havesincesuccessfullygrowntheirpremiumfinanceportfolios.AFS/IBEXgrewtonearly$350millionof
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portfolioasof last report from$77millionwhen thedealclosed,acompoundannual rateof35%.Similarly,Amerishasincreaseditspremiumfinanceportfoliotoinexcessof$600millionfrom$400million, a 15% compound annual growth rate,when it acquired the portfolio fromBrandBank inDecember2016.
Significantgrowthininsurancepremiumfinanceloanssinceacquisition
WebBank, controlledbySteelPartners, in early2019acquiredNationalPartners, a smallplatformled by a seasoned team largely assembled from various industry participants that have beenconsolidatedovertheyears.TriumphBankhasgrownitsdenovopremiumfinancedivisiontowellover$100millionofportfoliosinceinceptionin2016.LeadingplayersalsotargetcomplementaryfinancingmarketsThe table below illustrates the largest providers of premium financing in the United States. Eachoriginatesinexcessof$1billionannually. Company Ownership
1 ImperialPFS Private
2 AFCOCreditCorp BB&TCorp(BBT)
3 FIRSTInsuranceFunding WintrustFinancial(WTFC)
4 BankDirectCapitalFinance TexasCapitalBancshares(TCBI)
5 USPremiumFinance AmerisBank(ABCB)
6 AFS/IBEX MetaBank(CASH)
AFCOandFIRSTbothmaintainameaningfulpresenceinCanada,collectivelyoriginatingthemajorityoftheestimated$2.5billionoffinancingvolume.Several participants also have significant exposure to the life insurance premium financemarket,competing with banks such as Synovus (which acquired Global One, a $350 million portfolio, in2016)andPacWestBank(whichlaunchedateamin2011andnowreportsa$400millionportfolio).Wintrust has one of the largest life insurance premium finance portfolios in the U.S., recentlyreported at $4.6 billion, which complements its $3.4 billion commercial P&C premium financeportfolio.Combined,premiumfinanceconstitutesmorethan30%ofWintrust’sloanportfolio.
USPremiumFinance
Loansoutstanding($inmillions)AFS/IBEX
LoansOutstanding($inmillions)
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Mergers&acquisitionsactivitySince our last report, an estimated $2.5 billion of portfolio has traded hands across a half dozensignificanttransactionsintheU.S.commerciallinesinsurancepremiumfinanceindustry.Date Buyer Seller
Apr2019 WebBank NationalPartners(MLFFinancialGroup)
Apr2018 HWKaufmanGroup StonemarkInc.
Dec2017 ImperialPFS PremiumAssignmentCorp(SunTrust)
Jan2017 AmerisBank USPremiumFinance(BrandBank)
Jun2016 AFCO/BB&TCorp. Flatiron(WellsFargo)
Dec2014 MetaBank AFS/IBEXFinancialServices*Colonnade’sclientsinboldOutlookThe commercial lines insurance premium finance industry presents a compelling investmentopportunityforcommercialbanks.Severallargefinancialinstitutionshavealong,successfulhistorywith the asset class, enjoying high yields, short duration, and low loss rates. While several bankplayershaveexited,eachforuniquereasons,manynewentrantsarewaitinginthewings.Although consolidation over the past two decades has significantly reduced the inventory ofpropertiesavailableforacquisition,severalindependentfirmsareapproachingcriticalmassandmaysoonbetargetsforcommercialbanks.Financialsponsorshavetakennoteofbanks’deepinterestinowninginsurancepremiumfinanceplatformsandareincreasinglyseekingtoacquiresmalltomid-sizecompanies,capitalizing themtogrowtobecomeevenmorevaluableacquisition targets in thenearfuture.Colonnade’srecentinsurancepremiumfinancetransactions
has sold
to IPFS Corporation Colonnade acted as financial advisor with SunTrust Robinson Humphrey to SunTrust
Colonnade Securities LLC
has been acquired by
H.W. Kaufman Group Colonnade acted as exclusive financial advisor to Stonemark Colonnade Securities LLC
has been acquired by
Colonnade acted as exclusive financial advisor to US Premium Finance
Colonnade Securities LLC
has been acquired by
Colonnade acted as financial advisor to the management team of National Partners
Colonnade Advisors LLC
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Formoreinformationontheinsurancepremiumfinanceindustry,pleasecontact:
JeffGuylayManagingDirector208.726.0788
ChristopherGillockManagingDirector312.870.6212
GinaCockingManagingDirector312.425.8145
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orientationandasenseofurgencytoeachengagement.
ThisadvertisementwaspreparedNovember5,2019.Itisnotinvestmentadvice,andColonnadeundertakesnoobligationtoupdatetheinformationcontainedherein.
Sources:SECfilings,regulatoryfilings,andcompanypresentations.
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