M&A Activity Picks Up Steam In P-C Sector

M&A Activity Picks Up Steam In P-C Sector

Merger and acquisition activity in the overall insurance industry last year continued to decline, but the number of deals struck in the property-casualty sector picked up last year, and the dollar value soared, a study by Conning Research & Consulting has found.

The Hartford-based consulting and research firm's study titled “Mergers & Acquisitions and Public Equity Offerings, 2004 Edition” found that total transactions overall declined by almost 7 percent. However, the p-c sector bucked that trend, with the number of deals rising for the first time since 1998.

Overall, the transaction value of insurance industry M&As increased by more than 600 percent due to a flurry of deals at the end of 2003. The late-year deals, the firm said, ranked among the 10 largest mergers in the world, totaling $43.6 billion.

The p-c sector also experienced tremendous growth in the value deals struck, hitting its highest level since 2000.

The study noted that there was one mega-merger from each of the three major insurance sectors. The $59.9 billion industry total in 2003 was six times the total of 2002 and the second largest value behind $165.4 billion in 1998.

The overall M&A environment in property-casualty insurance has been driven by sellers looking to raise cash or dispense with unprofitable lines of business, according to Clint Harris, Conning vice president and the study's author.

“That accounted for a greater portion of the M&A activity than consolidation,” said Mr. Harris. “The largest merger in the [p-c] sector for last year was the St. Paul-Travelers [deal],” which fit the profile for consolidation. “But the majority of the deals [in 2003] were focused on dis-unit and non-consolidation reasons.”

He said this is the first upswing in mergers worth more than $1 billion in the past couple of years, after a number of significant mergers through the late 1990s.

“When you look at the p-c industry, it is not consolidated,” he went on to say. “In 2002, the market share of the top 25 insurers, in net premium written, was $63.3 billion, which was roughly the same as it was in 1998. There's only one insurer who has greater than 10 percent [of the market]. So there really are a lot of companies out there [available for consolidation].”

Carriers are not consolidating for several reasons, he added. Among them:

The perception that a few of the industry's large mergers were not successful.

Financial rating agencies have acted negatively to the moves, resulting in downgrades.

Concern with legacy exposures of liability or terrorism risk.

Concerns surrounding fallout of the Sarbanes-Oxley Act, which imposes “burdensome documentation of otherwise proprietary analysis of decision-making.”

A merger is also a distraction for the business, he noted, and requires the commitment of resources that companies are not willing to devote to the process.

“I don't point to any one of these reasons as greater in magnitude [for a company's decision not to pursue a merger],” said Mr. Harris. “It varies company by company.”

The study found that most trends for M&A remained as they have for the past two years. Property-casualty and life insurers focused on seller-motivated sales of business units. Consolidation drove the health insurance and distribution sectors, and the services sector continued in a relatively depressed state since the technology bubble burst, Conning said.

Mr. Harris said experience suggests that M&A activity is more pronounced during soft p-c market cycles, because companies don't need to merge to obtain growth in hard markets.

There are some good reasons why the industry should seek more consolidation, but there appears to be little to force major acquisition activity at this point, said Mr. Harris, noting that if there is a driver, it would be for intellectual and leadership capital.

“There will be more and larger consolidations,” he said, “but not necessarily a return to the mega-mergers at least through 2004.”

For more information on the survey, visit Conning's Web site at www.conningresearch.com .

Reproduced from National Underwriter Edition, May 14, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.