October 19, 2017

Breakingviews: TPG’s Car Insurance Deal Comes With a Warranty

by Breakingviews.

The less confident consumers feel, the more they pin their hopes on insurance and warranties. From such unhappy logic, TPG has plucked a financially fairly uplifting deal. The buyout firm has sold its car insurance business Warranty to U.S. insurer Assurant for $2.5 billion, roughly doubling its money over three and a half years. By paying mostly in shares, the buyer also gets some insurance of sorts.

Assurant wants to tilt its portfolio further towards “lifestyle” offerings. In plain speak, that means it wants to get more of its earnings from insuring personal effects like phones and cars, rather than housing, where premiums and fees are falling. Folding in Warranty will cut its reliance on home insurance to below half its preferred measure of earnings, and generate $60 million of annual cost savings, with a net present value of around $400 million. The price, at around 15 times earnings after including synergies, is roughly what $5 billion Assurant itself trades on.

TPG, a big investor in Uber – whose plans for autonomous vehicles threaten to one day upend the car insurance business – gets a decent profit on paper. It bought the business for $1.5 billion in March 2014, for which it paid around $850 million in equity. Take Assurant’s market capitalisation, add the $1.5 billion equity investment in Warranty, the lump-sum value of synergies and $372 million of cash, and TPG’s 23 percent stake in the combination could be worth well over twice what it paid.

Taking shares rather than cash isn’t the ideal private-equity exit. Still, TPG will get to participate in the upside if the enlarged business does well – or perhaps exit before Uber and its kind crunch the car-insurance market. It’s not yet clear how mobile phones, cars and houses will talk to one another, but it’s fairly likely they will, and insurance is one of the businesses in line for significant changes as a result. Both parties look pretty much assured of respectable returns.


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