Tuesday, August 06, 2013 3:06 PM ET Insurance M&A scoreboard Q2'13
By Adam Cancryn and Jan Haider Kiani
The insurance industry trudged through its slowest dealmaking period in recent history during the second quarter, signaling companies' continued reluctance to expand amid sluggish economic conditions.
Underwriters and brokers combined announced just 60 deals in the quarter, SNL data show. That is the lowest total since at least the financial crisis, and perhaps in close to two decades. SNL historical records indicate that the last time the M&A market was this inactive was the fourth quarter of 1996, nearly 17 years ago. However, that may not take into account certain foreign or multi-industry transactions, or second-quarter deals that firms have not yet reported.
The low deal count nevertheless lengthened an M&A drought that has persisted throughout this year. Insurers in the property & casualty and life sectors are focused on reinforcing and reorganizing their existing businesses rather than expanding into new ones, industry participants told SNL, leaving little appetite for large-scale consolidation.
Instead, companies are largely using M&A as a means to divest unwanted segments or quickly cut costs. Insurers have slimmed down their life operations in particular in past years, shedding annuity and other books of business weighed down by near-record-low interest rates. The Hartford Financial Services Group Inc. during the second quarter agreed to sell Hartford Life International Ltd. as part of its broader streamlining effort, shipping it to a Berkshire Hathaway Inc. subsidiary for $285 million. Allstate Corp. shortly after quarter-end said it would also deal one of its life insurance units, selling Lincoln Benefit Life Co. to private equity firm Resolution Life Holdings Inc. in a $600 million transaction.
Finding buyers, however, can be difficult when much of the sector is selling the same types of businesses. Private equity firms have almost exclusively served as the suitors for fixed and variable annuity blocks while insurers sit on the sidelines. That smaller, nontraditional pool might make it more difficult to find an appropriate partner and do a deal at the same pace as in the past, PricewaterhouseCoopers LLP Transaction Services Partner John Marra told SNL.
"For someone who's signaled, it could be a year before they're able to do a sale," he said. "I think private equity is maybe led more by financial objectives, supported by strategic objectives, and therefore the processes in general take longer."
Private equity's affair with the life sector has attracted much of the attention of late, given firms' willingness to take on costly interest rate-sensitive units in hopes they become more profitable down the road. But the sector also made a couple moves within the reinsurance industry. Stone Point Capital in the second quarter partnered with Enstar Group Ltd. on deals for Bermuda-based companies Atrium Underwriting Group Ltd. and Arden Reinsurance Co. Ltd.
Property & casualty dealmakers have had little such luck. The sector over the last two years has shared life insurers' contractionary attitude, aiming to stabilize its profit margins in lieu of chasing growth.
Companies raised prices across various business lines, narrowed their exposures and modified their existing products. But those profit-boosting tactics rarely involved M&A. P&C insurers have shied away from much risk-taking, opting instead to spend money on internal initiatives and shareholder-pleasing stock buybacks. Even as industry valuations recovered, Aite Group senior analyst Stephen Applebaum said that the still-shaky economy has prevented many companies from pulling the trigger on a large deal.
"If it wasn't for Travelers and Dominion, we wouldn't have much to talk about," he told SNL, referring to Travelers Cos. Inc.'s $1.10 billion deal for E-L Financial Corp. Ltd.'s Dominion of Canada General Insurance Co. "I don't expect to see any more or much more of that sort of activity."
Applebaum added that Travelers found in Dominion the rare partner that could instantly expand its footprint and provide it with a valuable foreign revenue stream. Dominion in turn wanted a partner like analytics-focused Travelers that could bring its technology and systems up to date, making for a seemingly perfect strategic combination.
Few believe there are other major marriages on the immediate horizon. But there is a bit more optimism for 2014, when companies might wrap up their pricing actions and set their sights once again on growth. P&C insurers are sitting on massive amounts of cash, and the share buybacks that they leaned on heavily are less effective as stock valuations rise. Should the economy remain upright and the weather calm, Applebaum forecast a string of big deals.
"2014, barring any shocking economic or terrorist-type development, is probably going to be an M&A year that I predict will beat 2010 in both deal count and value," he said. "The domestic market is really competitive. Organic growth is like trying to win a baseball game on singles. It's really, really hard."
There is similar sentiment on the life side, in that there are so many properties up for sale that deals are inevitable. The question is how fast they move through the pipeline and who is at the receiving end. A significant uptick in interest rates could speed insurers' return to the market as buyers, though likely more for traditional life businesses than annuities. And private equity firms appear committed to becoming major players within the sector for the near future. There might not be many massive mergers, but there could be a steady stream of block deals
throughout the second half.
"This is the new annuity world," Marra said. "You have buyers that are looking for a very narrow block of business acquisition, and sellers that are looking for a very narrow exit."
Among brokers, the market is driven less by the economic factors that have dogged underwriters. Rather, industry participants characterized the relatively quiet 41-deal second quarter as a collective regrouping. Tax changes at the end of 2012 drove a flurry of deals before the New Year, exhausting acquisitive companies' deal prospects. They then spent the first six months finding new acquisition prospects, work that should pay off during the third and fourth quarters.
"The pipeline is very robust, and we expect to have a number of mergers close in the second half of 2013," Arthur J. Gallagher & Co. Chairman, President and CEO J. Patrick Gallagher Jr. said during a second-quarter earnings call. "They come at their own pace. … Each one is different, each one has its own personality."
Private equity firm Madison Dearborn Partners LLC's takeout of National Financial Partners Corp. made a big splash in the brokerage space during the second quarter, along with Brown & Brown Inc.'s $360.0 million deal for Beecher Carlson Holdings Inc.
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