Recent volatility in the financial markets and a difficult operating environment continue to stifle merger and acquisition (M&A) activity, and GC Securities does not expect a dramatic increase in deal flow through the end of 2011. However, conditions are in place for mergers and acquisitions to reassert their fundamental purpose: for strong corporate performers to match acquisitions to their long-term strategic objectives and to drive out weak, inefficient players.
Property and casualty (P&C) M&A activity for risk-bearing entities thus far in 2011 is at a level roughly similar to the past two years (see figure below). Through mid-October, there were 36 announced and closed transactions with an aggregate deal value of about USD4.6 billion - well off the 2008 levels, when there were 71 transactions for a total of USD16.8 billion for the year.
P&C insurance sector valuations are attractive by absolute and relative standards. The market value of many companies is closer to their estimated intrinsic value now than any time in the past 20 years, and cash balances are high. What’s more, a relatively weak U.S. dollar offers insurers in Europe and Asia an opportunity to take advantage of U.S. acquisitions.
Other factors that could affect the level of (re)insurance M&A activity over the next 12 months include:
European financial services companies will continue analyzing strategic options for insurance operations in the face of the coming regulatory changes. The focus likely will be on non-core (re)insurance operations and alternative M&A transactions to clean up balance sheets for example, the use of run-off sales.
Turn in the market
The unprecedented amount of worldwide catastrophes during the first half of 2011 has placed pressure on insurers and reinsurers. Many have exhausted their catastrophe budgets for the year. Should another major catastrophe strike, the tipping point from earnings event to capital event could be reached, thereby causing rates to increase. A hardening of the market would likely change insurers’ focus from one primarily focused on growth via acquisition to a more balanced view incorporating growth organically and via acquisitions. A perceived market hardening would also likely lead to increased return on equity expectations and thereby increased valuation levels for publicly traded companies. Improving market fundamentals and valuation levels may result in more M&A activity.
Pressure on reserves
Guy Carpenter’s analysis of the U.S. reserving cycle over the past 30 years suggests the tide may be turning and a period of reserve shortfalls looms. Add potential pressures from inflation in some markets, weak investment returns and, in Europe, higher reserving charges from Solvency II, and a challenging cyclical phase may serve as a catalyst for increased M&A activity.
* Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.