Rate Levels Seen As Setting Insurers' Future M&A Activity

Paul W. Brown, managing director of Merrill Lynch, said the overall rate environment defines M&A activity, and that the hardening market will have an impact that may spur some 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.

According to Anne Kronenberg, managing director, co-head of NA FIG Insurance, JPMorgan Securities Inc., the "bread and butter" of M&A activity among p-c insurers will continue to be in the range of $500 million to $2 billion transactions where companies will buy and sell niche businesses.

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 stocks.

While Ms. Kronenberg said such takeovers are still difficult to do in the p-c industry, Mr. Brown said, "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 company has just missed one quarter of earnings, and the stock has dipped because of that, the board may feel confident turning away such an offer. But, he added, that offer may be more difficult to refuse if the stock declines have gone on for a while.

The dropping value of the dollar versus foreign currencies may have a "psychological effect" on the M&A appetite of foreign companies, Ms. Kronenberg said.

She said these companies may 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 overall strategies and growth in the market, and not so much on the temporary status of foreign exchanges.

With respect to 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.

However, that poll also found that the analysts do not see M&A activity as the best use of capital, and they do not see it as the best way to improve ratings. The survey said that 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 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.