Uncertainty and risk aversion trumped other, more favorablemergers and acquisitions factors present in 2013 to drive U.S.property and casualty M&A activity to its lowest level sincethe 2008-09 fiscal crisis, a new report says.

Conning’s recent “Global Insurance Mergers & Acquisitions in2013: A Tale of Two Markets” reveals U.S. insurance M&Aactivity declined in volume and value from 2012 to 2013, withactivity particularly weak among underwriters. Theinsurance-distribution and insurance-services sectors saw morerobust activity, Conning says.

The report notes, “Many of the ingredients for a robust U.S.insurance M&A market were present in 2013,” pointing to signsof life in the job market, recovering consumer confidence, publiclytraded insurers achieving stock prices above book value for thefirst time in several years, attractive lending conditions, andactive purchasing among sophisticated private-equity investors.

Despite these factors, Conning says uncertainty muted M&Aactivity within the U.S. “Attractive international acquisitionopportunities, reserving issues at home, changing U.S. and Europeanstatutory capital requirements and rating downgrades all had someinfluence on the tone of the market,” states the report. “Thus,without a reasonable degree of certainty surrounding future growthprospects, inactivity in insurance M&A prevailed.”

Conning says 70% of the top 20 global transactions werecompleted outside the U.S. in 2013.

For P&C insurers, Conning says there were 39 announcedtransactions in 2013 “involving a U.S. entity as buyer or seller ofa property-casualty target, down from 46 in 2012.” The aggregatevalue of the deals dropped to $4.4 billion compared to $4.7 billionin 2012.

Lingering uncertainty about the economic recovery and reducedconfidence in loss-reserve adequacy impacted activity, Conningsays. “Many of the targets of M&A were specialty insurersfocusing on lines related to…recovering economic sectors—workers’compensation, personal lines, surety, and commercial automobile,”the report adds.

M&A activity within the U.S. was also adversely impacted bya drive for global growth. “Three of the transactions involved aU.S. insurer acquiring a non-U.S. entity,” Conning says.

Two P&C underwriter transactions were valued at over $1billion:

• Goldman Sachs’ $1.1 billion acquisition of 50% of U.K. directautomobile writer Hastings.
• Travelers’ $1.1 billion acquisition of the Dominion ofCanada.

There were seven U.S. midsized property-casualty transactions,where the announced value was between $100 million and $1 billion,compared to seven in 2012.

Agent/broker market remains active

For the insurance-distribution sector, the M&A market wasrobust for both buyers and sellers, says Conning.

Commissions increased due to more insurable exposures in arecovering economy and favorable P&C pricing trends in 2013.The healthcare law also drove M&A activity: “Reporting andservicing requirements resulting from the implementation of the[Affordable Care Act] are driving many smaller employee benefitsbrokers to seek refuge in the arms of their larger competitors,”Conning says.

The report adds, “All consolidators in 2013 were faced with thesame market dynamics: competition from an increasing number ofnewer private-equity buyers with readily available financing tocomplete acquisitions quickly, [and] pricing for properties at thehigher end of historical norms as both strategic and financialbuyers compete aggressively for assets.”

Conning notes these influences will likely be present in early2014 as well.

The most active aggregators, according to the report, “continueto be Arthur J. Gallagher, Hub International, Confie Seguros,Assured Partners, BroadStreet Partners, and Digital Insurance, eachcompleting at least 10 acquisitions in 2013.”

The drivers of property-casualty M&A activity in 2013 werethe recovery of economic growth, albeit modest. Sectors benefitingfrom a recovering economy include consumer spending, housing andconstruction, employment, and transportation.

Outside of the U.S., Conning says, “Acquisitions of Central andEastern European insurance targets by non-U.S. buyers reflected theinterest in tapping into higher economic-growth rates in EasternEuropean countries. The second-largest M&A transaction of theyear was such a transaction—Generali acquiring the remainder of itsshare of a joint venture with the Czech PPF for $3.3 billion.”

Interest continued in acquiring targets “in the coveted Asia andLatin America regions,” but Conning says activity slowed in theseregions, “perhaps reflecting overheated competition over fewavailable targets.”

Ultimately, Conning says M&A in the insurance industryoverall in 2013 “proved to be simultaneously positive and negative,inspiring some opportunistic mergers while mostly drivingcaution-inducing inaction.”