Don’t Expect Much in the Way of Insurance M&A

Locked in a soft market and facing economic headwinds, one might expect insurers to view mergers and acquisitions as a natural avenue for growth. Yet, discounting a few sizable transaction related to the restructuring of American International Group, the past few years has been largely devoid of deals in the insurance industry.

The question of why was a recurring theme this week in Toronto at the International Insurance Society’s Annual Seminar.

Kicking off a panel discussion, Stephen Packard, director, Deloitte Consulting USA, noted the optics of the industry seem favor consolidation, with roughly 2,900 P&C insurers and 1,100 life insurers in the U.S. and valuations at historic lows. “This is very fragmented business ripe, or some would say overripe, for consolidation,” he said.

Greg Locraft, executive director, Morgan Stanley, said the low valuations were likely a culprit for the dearth of deals “The P&C industry as a whole trades at 80% of book value,” he said. “Who wants to sell their business at such low valuations?”

Locraft said that the dim view investors held of insurers was puzzling considering that over time the stocks have done well, especially compared to other sectors of the financial services industry. “Insurers have that perpetual problem: it’s just not as sexy as other industries,” he said.

Using share price as a yard stick, the lack of mergers may not be a bad thing. Citing historical stock data, Locraft indicated that the stock performance of acquiring companies post M&A is, on average, abysmal. Thus he said companies would be better off spending excess capital retooling for organic growth, retiring debt or buying back shares rather than spending the money on acquisitions. “Wall Street loves stock buybacks,” he said. “There is a high bar [in the mind of investors] for companies choosing M&A.”

Nonetheless, mergers can work. John O’Connor, President and CEO of Endurance Services USA, notes that his firm, which was founded in 2001, has grown through a steady diet of acquisitions, including acquisitions of XL Surety, LaSalle Re and Hartford Re. O’Connor offered a great deal of advice for companies considering M&A. He said whenever expanding into a new geography or line of business, companies were wise to first establish a beachhead organically in the market in order to learn it before looking for companies to acquire. O’Connor also counseled would be acquirers to make sure that they will able to easily integrate and exercise control over the intended target.  Performing due diligence (including on-site interviews and robust pre-work) and ensuring the company you are acquiring has acceptable legacy liabilities exposures is also vital, he said. “You have to know the questions you want to ask to get to the heart of the deal,” he said. “What are the show stoppers?”

So if deals can be done, where and when will they be?  Tom Vandever, managing director, Goldman Sachs, said since deals are largely dependent on the macro economy, he expects only episodic action, with the bulk of activity on the life side. Moreover, expects a rise of cross border deals with Western firms buying into emerging markets and even well capitalized foreign entities (i.e. cash-flush Chinese Banks) looking to enter developed markets. “M&A follows capital flows.”

 

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