Zurich has announced that it will acquire MetLife’s US P&C business for $3.94bn. Zurich will contribute $2.43bn via Farmers Group Inc and the Farmers Exchanges $1.51bn. Zurich’s share of the deal will be financed by internal resources and hybrid debt issuance. Following the transaction, Zurich’s SST ratio is expected to remain around 190%. Pro forma for the acquisition, Farmers Exchange will write more than $20bn of direct written premium and it will become the 6th largest personal lines player nationwide (from 7th). Farmers Exchanges premium base is expected to increase around 18% with Farmers BOP contribution to Group level increasing by 3ppts to 31%.
ROE and EPS are expected to be accretive from the first full year of the transaction with the cash return on investment expected to be 10% from year 3 onwards.
Increasing fee-based business seems sensible given relative valuations
The deal makes strategic sense to us. It offers the Farmers Exchanges a nationwide presence with the ability to access new distribution channels and includes a 10-year exclusive distribution agreement in which the Farmers Exchanges will offer its personal lines products on MetLife’s benefit platform.
The valuation multiple being paid suggests 16x on a trailing (2019) earning basis but just under 11x on an underlying adjusted earnings basis that the company set out in its presentation, which is a roughly similar level to that of 2018 ($345m).
The deal uplifts the contribution of fee-based, capital-light business to Group earnings. In theory, this should improve the valuation multiple of the stock, but we will wait to see how this plays out in practice.
RBC Fundamental view
We continue to see Zurich having a sensible plan to deliver a strong ROE over the 2020-22E period. Management are focused on delivering both ROE and dividends to shareholders. However, at the current valuation, we see this benefit of a stable, reliable franchise being priced in.