Conditions are ripe for an increase in merger and acquisition activity, but the state-based system of insurance regulation is impeding the number of deals taking place, one financial analyst suggests.
M&A activity has been unjustifiably slow, V.J. Dowling, managing partner at Dowling & Partners Securities LLC, noted here during the recent Standard and Poor's "Insurance 2008 Conference: Operating Within a Global Economy."
Speaking as part of a broader panel, he added that last year, even the $250 million-plus transactions that did occur were not what he called "traditional deals" involving public companies. Instead, they involved mutual companies, foreign carriers and, in one case, a hedge fund, he said.
One reason for the slower activity, according to Mr. Dowling, is the state-based regulation of insurance. He cited one example in the past where Alleghany Corp. attempted to buy the St. Paul Companies. The deal received much of the necessary approvals, he said–except for a few states, which killed the transaction.
State regulators sometimes view their roles as job protectors for their particular states, said Mr. Dowling, who reasoned that some deals cannot occur unless the companies being bought "raise their hands" to be purchased. He noted that in the current soft insurance market, some companies may indeed begin to raise their hands.
Mr. Dowling said it makes sense for two overcapitalized companies to merge together–especially if the deal increases diversification. He also said that valuations are lower now than they were a year ago, so deals may look better.
Mr. Dowling added that U.S. companies need to be mindful of their small size relative to foreign counterparts, noting that U.S. carriers are "pup-sized" compared to larger insurers overseas, which may help spur some M&A activity.
Regarding property-casualty market conditions as a whole, Robert E. Glanville, managing director of Pine Brook Road Partners LLC, said companies are not as reckless in this soft market period as they have been in previous cycles. He said he has yet to meet a company in this cycle that has named "growth" as the primary objective.
Property-casualty companies are instead looking for an effective return on their capital, according to Mr. Glanville.
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