U.S. Insurer Allstate to Acquire National General for $4 Billion in Cash

Allstate Corporation, the largest publicly held personal lines property and casualty insurer in America, has announced the acquisition of National General Holdings Corp for approximately $4 billion in cash, or $34.50 per share, expanding its auto insurance business amid the COVID-19 pandemic.

Allstate, which is also one of the largest U.S. auto insurers, said the National General shareholders will receive $32.00 per share in cash, including dividends anticipated to be $2.50 per share, providing $34.50 in total value per share. The auto insurer will also fund the share purchase by deploying $2.2 billion in combined cash resources and, subject to market conditions, issuing $1.5 billion of new senior debt.

National General’s board of directors has approved the transaction, which includes customary terms and conditions, including a breakup fee of $132.5 million. A voting agreement has also been signed with entities controlling 40% of National General’s common shares to vote for the transaction, the company added.

The above-mentioned offering is expected to close in 2021.

Ardea Partners LP was the exclusive financial adviser to Allstate, and Willkie Farr & Gallagher LLP was the company’s legal adviser. J.P. Morgan Securities LLC was the exclusive financial adviser to National General, and Paul, Weiss, Rifkind, Wharton & Garrison LLP was National General’s legal counsel.

Executives’ comments

“Acquiring National General accelerates Allstate’s strategy to increase market share in personal property-liability and significantly expands our independent agent distribution,” Tom Wilson, Chair, President and CEO of the Allstate Corporation said in a press release.

“The acquisition increases personal lines premiums by $4.0 billion and market share by over 1 percentage point to 10%. National General’s business and technology platforms will be utilized to further strengthen Allstate’s existing independent agent businesses. The transaction will be accretive to adjusted net income earnings per share and return on equity beginning in the first year.”

“National General’s operating expertise has enabled us to serve customers and independent agents well as we have grown both organically and through acquisition,” Barry Karfunkel, Co-Chairman and CEO of National General said in a press release.

“We are excited about combining our team’s expertise and commitment with Allstate to become a top-five personal lines carrier for independent agents while offering a broader array of products. National General’s shareholders are also benefiting by unlocking the value created over the last decade.”

Allstate price target and outlook

Eight analysts forecast the average price in 12 months at $118.86 with a high forecast of $138.00 and a low forecast of $101.00. The average price target represents a 28.29% increase from the last price of $92.65, according to Tipranks. From those eight, four analysts rated ‘Buy’, four rated ‘Hold’ and none rated ‘Sell’.

Morgan Stanley lifted their target price on shares of Allstate from $111.00 to $115.00 with a high of $136 under a bull scenario and $67 under the worst-case scenario and gave the company an “equal weight” rating. Deutsche Bank lifted their target price on shares of Allstate from $115.00 to $120.00 and gave the company a “hold” rating.

Credit Suisse Group upgraded shares of Allstate from an “underperform” rating to a “neutral” rating and lifted their target price for the company from $94.00 to $101.00 in a report on Thursday, June 25th. Piper Sandler raised the target price to $112 from $108.

Morgan Stanley’s view on the acquisition

“The acquisition of National General, given its focus on nonstandard auto coverage in the independent agency channel, is likely a surprise to investors. Recent acquisitions have focused away from the traditional personal lines space to diversify Allstate’s offerings, rendering this transaction all the more surprising. In recent years, the direct channel has taken greater share from captive agencies in personal auto than independent agencies,” Michael W. Phillips, equity analyst at Morgan Stanley noted in April.

“As such, National General provides Allstate with another method of combatting the challenge to the captive agency model, given its market share declines in recent years. Likewise, National General has presence in lender-placed homeowners insurance, which benefits during recessions. As such, entering LPI could further insulate Allstate during a downturn, making the deal incrementally more attractive given current challenges in the macro environment,” the analyst added.

Upside and Downside risks

Upside:

Auto loss trends improve further, unit growth drives top-line acceleration, continued strong share repurchase, benign cats, and interest rates rise.

Downside:

Personal auto loss costs turn higher, lack of unit growth, performance volatility, unpredictable losses from catastrophes and investments.