Assurant and Intelligent Acquisitions

Those who have read me for a long time know that my favorite insurance company is Assurant. I’m not writing tonight about how they had great first quarter earnings (see transcript), or how their investment portfolio suffered less than their competitors. Rather, it springs from a Bloomberg article that is not available on the web. It seems Assurant is talking to Countrywide (CFC) about purchasing their Balboa Insurance Group.

What makes for an intelligent acquisition? Two things: Don’t overpay, and don't flub the integration.

On overpaying, it helps if you are buying:

• part of a business rather than the whole company
• a noncore asset of the target
• and offering noneconomic benefits (e.g. joining Berkshire Hathaway, because Warren doesn’t change the culture…)
• through a negotiation, not an auction (think of MetLife buying Traveler’s Life)
• something where you can get significant expense savings
• and you are known to be prudent and fair as an acquirer.

On integrating, it helps if:

• you are integrating a business that differs from your business in at most one or two ways
• corporate cultures are similar
• the differences in technology are small
• you gain new markets or technologies that you can use in the rest of your business.

Assurant has done very well through small in-fill acquisitions where they pick up a new line of business that they can grow organically. They also have done well in occasionally buying scale in areas where they are already strong, for example, when they bought the pre-need (funeral) insurance business of Service Corp International (a very concentrated niche business line).

With Balboa Insurance Group, Assurant would deepen its penetration into lender placed homeowners insurance. Assurant is #1, and Balboa I think is #2 because of its business with Countrywide. Assurant has efficient systems — they will be able to take out costs, and deliver even better service to Countrywide / Bank of America (BAC).

Now, if Countrywide is interested in selling, it is likely that the best bid would come from Assurant, not because they will overpay, but because they can offer the best service, and take out the most in expenses. Bank of America would likely find Balboa to be a small noncore asset, so their interest in retaining it would be low.

Here’s small excerpt from the Bloomberg piece:

“Certainly that is a business we would be interested in,” Assurant Chief Executive Officer Robert Pollock said today in a conference call with investors. “Until things between Bank of America and Countrywide close, I don’t think that’s going to be a focus” for Bank of America.

Countrywide, based in Calabasas, California, reported a first-quarter loss of $893 million earlier this month, its third straight quarterly loss, as late mortgage payments and home foreclosures rose. Bank of America said April 21 that its purchase, which would make the Charlotte, North Carolina-based bank the largest U.S. mortgage lender, remained on course forcompletion in the third quarter.

“Even in that case though, we still have to evaluate what we would have to pay for that business versus our ability to win” Balboa, Gene Mergelmeyer, president of Assurant’s specialty property business, said in the call.

So, I look at this as a possible plus for both Bank of America and Assurant. Balboa will be most valuable in Assurant’s hands. Put it this way, why would another insurer want to buy Balboa when it is up against much superior competition?

PS — From the “don’t give a sucker an even break” file, Bank of America may not guarantee the debt of Countrywide. This should not be a surprise. They aren’t required to guarantee the debt, and Countrywide bondholders should just be grateful for the equity infusion. If things get bad, though, Bank of America could walk away from Countrywide, and give it to the bondholders.

Disclosure: Long AIZ