Allstate (ALL -1.36%) is one of the largest life insurance companies in the world, and it just announced a splashy acquisition that will make it even larger. The company is acquiring National General Holdings (NGHC) for $4 billion, or about $34.50 per share.
This acquisition will expand Allstate's reach in the independent agent channel for auto and homeowner's insurance, and increase Allstate's market share in personal property-liability insurance.
Is bigger better in this case?
Allstate's $4 billion acquisition
Like Allstate, National General is a property, auto, and life insurance company. National General has a much smaller insurance operation, but it is the second-largest U.S. lender-placed insurance provider and has one of the largest networks of independent agents to sell its products.
Allstate will be acquiring 100% of National General in an all-cash deal. The acquisition totals a sizable $4 billion, which is a multiple of 11.9 times National General's earnings.
The deal was structured so that National General shareholders will receive $32 per share in cash and be paid a closing dividend of up to $2.50 per share based on the company's financial performance in 2020. If National General falls short of its earnings growth expectations, the closing dividend could be reduced to $1.50 per share. This is an interesting deal structure that creates a good incentive for both the buyer (to close the deal) and the seller (to keep up financial performance).
Allstate intends to finance the deal with cash on hand. The transaction will need to be approved by National General's shareholders and is expected to close by early 2021.
All about growth
Why is Allstate acquiring National General? It has a lot to do with National General's relationship with independent insurance agents. Today, Allstate primarily uses its own salesforce to distribute its product, but gaining better access to independent agents will help Allstate capture additional segments of the market where there are no current Allstate agents. The acquisition would establish the combined company as a top-five independent agent insurance carrier.
There are other benefits to the acquisition. National General has a strong position in higher-risk auto insurance policies and lender-placed policies, which will be nice boosts to Allstate's overall product portfolio.
Most importantly, this deal is about growth. The COVID-19 pandemic has been tough on insurance companies like Allstate. People are driving less, resulting in fewer auto policies being sold. The company reported its sales were down 8.3% when it reported its first quarter in 2020.
Acquiring National General should help shore up revenue growth and expand Allstate's reach with independent agents. The deal is also expected to generate cost synergies, which should be a nice kicker to the bottom line.
Moving into the big leagues
Allstate is already a fairly large insurance company, but adding National General will bolster this position. The deal will catapult Allstate to being a top-five independent agent insurance carrier, and should result in meaningful revenue and earnings growth.
Despite the COVID-19 pandemic, Allstate is making interesting strategic moves that could benefit it for years to come.