September 17th, 2015

Disruptive Forces to M&A Activity

Posted at 1:00 AM ET

The reality is that many external forces continually disrupt the impact on merger & acquisition (M&A) activity of the insurance pricing cycle. This is especially true in recent years as insurance markets are influenced by wider financial conditions, new investors, globalization and the benefits of healthy profits despite a prolonged period of rate softening. These disruptive forces provide both positive and negative contributions to the M&A-conducive market conditions resulting from the current stage in the insurance cycle.

Capital Markets Have Provided Improved Buyer Currency

Wider financial market conditions naturally impact M&A activity. As illustrated in this GC Capital Ideas post ”A Compelling Correlation to Past Market Cycles,” the reserved M&A markets following 2008, despite softening markets, were consistent with the onset of the financial crisis.

Insurance company valuations have in recent years shown substantial appreciation. Given the soft premium rates and low investment yields, the heightened valuations can be attributed principally to broader market sentiment but also the anticipated M&A activity within insurance markets.

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The improved value of stocks provides insurance companies with acquisition currency through stock-based considerations and/or equity issuances. When this is combined with improved debt markets, market consolidators have an improved ability to finance transactions. It is further notable that management’s confidence to enter into transformational transactions has been bolstered through investor acceptance of the arguments of scale and merger synergies and willingness to withstand short to mid-term tangible book value per share dilution.

The increased availability of acquisition finance and supportive investor sentiment are likely enablers of market consolidation, thereby supporting the soft market motivations described above.

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