Future property-casualty merger and acquisition activity will be defined largely by the overall premium rate environment, with the softening market prompting more carriers to seek growth via takeovers, experts here predict.

After the late-1990s, M&A activity fell off as the commercial insurance market hardened, noted Michael Fallon, vice president and director of corporate finance for Liberty Mutual, in comments at a meeting sponsored by consultants Tillinghast-Towers Perrin and the Dewey & LeBoeuf law firm.

With rates rising, he recalled, companies grew through premium gains and by cleaning up balance sheets. However, he noted, with organic growth now hard to come by in the softening market, more will look to acquire books of business.

Indeed, the overall rate environment defines M&A activity, according to Paul W. Brown, managing director of Merrill Lynch, who said the softening market might thus spur more M&A transactions.

Companies that have done a good job of growing their business in the hard market through rate increases, he noted, will begin to look at “what's next” as the market softens and rates drop.

The “bread and butter” of M&A activity among p-c insurers will continue to be transactions in the range of $500 million to $2 billion, with companies buying and selling niche books of business, according to Anne Kronenberg, managing director and co-head of NA FIG Insurance at JPMorgan Securities Inc. She added that there may be an occasional large-scale acquisition, “but it will truly be here and there.”

The stock market could also affect M&A activity, Mr. Brown said, noting that p-c company stocks are down anywhere from 10-to-20 percent. The panel discussed the possibility that unsolicited transactions may increase due to declining stock values.

While Ms. Kronenberg said such takeovers are still difficult to pull off in the p-c industry, Mr. Brown said that “if you're a target board, and someone comes to you and offers you 35-to-40 percent, or 45 percent premium to your current market value…you have a real problem telling someone at 45 percent premium to go away…”

He said much depends on how long the target company's stock has been down. If the carrier has just missed one quarter of earnings, and the stock dipped because of that, the board may feel confident turning away such an offer. However, he added, that offer may be more difficult to refuse if the stock declines have gone on for awhile.

The dropping value of the dollar versus foreign currencies may also have a “psychological effect” on the M&A appetite of foreign carriers, Ms. Kronenberg said, noting that buyers might feel better about making exchanges when the dollar is weaker. But speaking to the overall economic impact of transactions, she explained that M&A activity is based on more general strategies and overall growth in the market, and not so much on the temporary status of foreign exchange rates.

As for life insurance companies, a separate panel of experts had mentioned that there are far more buyers than sellers with respect to M&A activity. Asked if this is true of p-c companies, Mr. Brown said the gap between buyers and sellers is leveling off. He noted that between 1999 and 2004, the M&A market was “just shut.”

He said a lot of p-c companies that are now publicly traded would have been sold in a normal M&A environment rather than taken public, “so I think there is a backlog of four or five years worth of deals that at some point will [possibly] get done.”

The panel's comments regarding M&A activity came shortly after Accenture released the results of a poll of analysts, which found that M&A activity is expected to significantly increase this year. (See related story on page 10.)

However, that poll also found that the analysts do not see M&A activity as the best use of capital, nor the most effective way to improve ratings. The survey said analysts prefer share buybacks and organic growth over M&A.

Signs of a possible increase in M&A activity were also noted by a speaker last week at the Inland Marine Underwriters Association's annual conference, based on a decrease in insurance company valuations and the high level of surplus among insurers. Carriers' difficulty growing organically in a soft market was also cited.

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Softening Market Likely To Spur More M&A Activity Among Niche P-C Insurers

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