Property & casualty (P&C) merger and acquisition (M&A) activity in the United States and Bermuda in 2011, as measured by the number of transactions, was at a level below the previous year’s after being stifled by volatility in the financial markets and a difficult operating environment. In dollar terms, M&A activity for P&C risk-bearing entities in 2011 was at a higher level than that seen in the past two years (see Figure 1 below). The last six weeks of 2011 saw two of the largest deals, totaling more than USD6.3 billion combined, or almost 50 percent of the full year’s deal activity. The limited activity was in spite of attractive insurance sector valuations by absolute and relative standards, with the market value of many companies closer to estimated intrinsic value than any time in the past 20 years and the fact that potential acquirers had large cash balances. Somewhat tempering activity was the fact that many carriers turned to share buybacks as an effective use of cash to manage capital, as opposed to going on an acquisition spree.
As illustrated by Figure 1, 2011 saw 71 transactions with an aggregate deal value of about USD12.8 billion, in line with 2008’s level when 72 transactions closed for a total of USD16.8 billion. While the absolute dollar value of M&A transactions announced in 2011 exceeds both 2009 and 2010 levels, the number of transactions was down from 2010.
Themes and Trends Observed During 2011
Economic Conditions Dampened M&A Activity – The economic uncertainty and volatility in global equity markets reinforced a higher level of caution amongst management teams as they reviewed their strategic alternatives.
Small and Middle-Market Deal Activity – The bulk of activity continued to be in the small and middle-market arenas, with “large” transactions often in the USD500 million to USD750 million range. 2011 saw three transactions in the billion dollar and greater range – one with a transaction value of exactly USD1 billion and two with announced transaction values of USD3.5 billion and USD2.8 billion. Prior to these two announced transactions, the largest P&C transaction completed since 2008 was valued at USD1.9 billion and occurred in 2009. As the chart below shows, transaction activity with a deal value above USD750 million has been flat, while deals in the USD250-USD750 million range have increased substantially. Transactions closing below USD250 million have declined modestly since 2009 but continue to represent the vast majority of transactions each year.
Cautious Acquirer Activity – Immediately following the 2008 financial crisis, there was a significant gap between buyers’ and sellers’ valuation expectations, which hampered deal activity. While bid/ask ranges have narrowed, Guy Carpenter continues to see buyers exercise strict pricing discipline. In addition, the time required to close transactions remains significantly longer than it was prior to the financial crisis. Deals continue to get done, but sellers can expect intense due diligence activities from prospective acquirers.
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