Bart Zanelli, Managing Director; Geoffrey Sweitzer, Managing Director; Jeffrey Hathaway, Assistant Vice President; GC Securities*
The recent volatility in the financial markets and the difficult operating environment in general continue to stifle merger and acquisition (M&A) activity. Property/casualty (P&C) M&A activity for risk-bearing entities in the first half of 2011 was at a similar level to that seen in the past two years. There were 22 announced and closed transactions with an aggregate deal value of almost USD3.4 billion during the first half of 2011. In terms of transaction value, this pace is on track to match the level seen during 2009 and 2010. In addition, industry reports indicated there were an additional 15 transactions that had been announced during the first half of the year, but not closed. If these deals were to close at their announced transaction values, this would add an additional USD1.8 billion in transaction value to 2011’s total.
Two main, countervailing factors are affecting the current level of activity in the marketplace.
- Higher valuation levels in the first half of 2011: Economic growth and the equity market’s rise in 2010 and the first half of 2011 led to higher insurance company valuations – although this situation has now been mitigated by a broad market decline in response to negative economic growth estimate revisions. Prior to August 2011, with more companies trading close to book value than in the months following the financial crisis, prospective targets became more palatable to sellers’ boards. In addition, the option of using stock as an acquisition currency became more attractive, as equity values were boosted. This resulted in several high-profile takeover attempts in the quoted space.
- A recovering but still shaky economy: Recent economic developments – such as the risk of the Greek economic crisis spreading to the rest of the European Union and the difficult employment and debt situation in the United States – are placing continued strain on the current macroeconomic environment. This, coupled with memories of the financial crisis in 2008, continue to see boards and management teams adopt a cautious stance.
Despite the uncertain macroeconomic picture, there are other leading indicators that will likely affect the level of P&C insurance M&A over the next 12 months:
- Solvency II: European financial services companies will continue to analyze strategic options for insurance operations in the face of the coming regulatory changes. In particular, focus will likely be on non-core (re)insurance operations and alternative M&A transactions to clean up balance sheets, for example, run-off sales.
- Turn in the market: The unprecedented amount of catastrophes seen world-wide during the first half of 2011 has placed pressure on 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 away from growth via acquisition and back to organic growth.
- Pressure on Mutuals: Many mutuals are facing downward pressure on their financial strength ratings, causing them to face headwinds on both the capital raising and divestiture fronts.
These factors, along with macroeconomic developments, will influence the level of M&A activity over the next 12 months. Although company valuations improved as equity markets rose in 2010 and the first half of 2011, the subsequent volatility in the financial markets has reinforced the cautious mood in the sector. A key factor in determining future M&A activity will be whether the recent financial volatility is a temporary blip or confirmation of a double-dip recession.
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* 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.