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

Conning’s recent “Global Insurance Mergers & Acquisitions in 2013: A Tale of Two Markets” reveals U.S. insurance M&A activity declined in volume and value from 2012 to 2013, with activity particularly weak among underwriters. The insurance-distribution and insurance-services sectors saw more robust 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 signs of life in the job market, recovering consumer confidence, publicly traded insurers achieving stock prices above book value for the first time in several years, attractive lending conditions, and active purchasing among sophisticated private-equity investors.

Despite these factors, Conning says uncertainty muted M&A activity within the U.S. “Attractive international acquisition opportunities, reserving issues at home, changing U.S. and European statutory capital requirements and rating downgrades all had some influence on the tone of the market,” states the report. “Thus, without a reasonable degree of certainty surrounding future growth prospects, inactivity in insurance M&A prevailed.”

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

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

Lingering uncertainty about the economic recovery and reduced confidence in loss-reserve adequacy impacted activity, Conning says. “Many of the targets of M&A were specialty insurers focusing 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 by a drive for global growth. “Three of the transactions involved a U.S. insurer acquiring a non-U.S. entity,” Conning says.

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

  • Goldman Sachs’ $1.1 billion acquisition of 50% of U.K. direct automobile writer Hastings.
  • Travelers’ $1.1 billion acquisition of the Dominion of Canada. 

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 was robust for both buyers and sellers, says Conning. 

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

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

Conning notes these influences will likely be present in early 2014 as well.

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

The drivers of property-casualty M&A activity in 2013 were the recovery of economic growth, albeit modest. Sectors benefiting from a recovering economy include consumer spending, housing and construction, employment, and transportation. 

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

Interest continued in acquiring targets “in the coveted Asia and Latin America regions,” but Conning says activity slowed in these regions, “perhaps reflecting overheated competition over few available targets.”

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