Conning: Pieces in Place for U.S., Bermuda Consolidation in 2013

The ingredients are in place for stronger U.S. mergers and acquisitions activity in 2013, and the potential for deals among Bermuda reinsurers may finally be realized as competitive pressures increase momentum for consolidation, a new report says.

In Conning’s latest industry report, “U.S. and Global Insurance Industry Outlook 2013, Economic, Capital Markets, and Regulatory Challenges Continue: Nothing to Be Gained by Waiting for Things to Get Better,” the firm says U.S. M&A activity in the P&C sector could increase due to limited organic-growth opportunities, low interest rates and financing terms that are attractive to potential buyers, and an increased focus within the sector on reducing expense ratios.

Conning also says improved equity valuations “provide currency for stock buyers, potentially providing a more-attractive sale environment.”

Additionally, the firm says private-equity-owned companies in older vintage years will likely be seeking an exit strategy in 2013. “In the [P&C] sector alone, there are 16 private equity portfolio company insurers from vintages of 2009 and prior,” Conning says. “Of these, seven were acquired in 2007 or prior, meaning that they have been held for seven years or more. We may therefore expect private-equity exits to be one of the more active areas of insurance M&A in 2013.”

For Bermuda (re)insurers, Conning says, “The longstanding expectation of consolidation among reinsurers in Bermuda, particularly involving companies with relatively undifferentiated products, such as property-catastrophe cover, has yet to happen.”

But the firm says emergence of the new hedge-fund-backed reinsurance model may drive consolidation. “The appearance of this new type of provider, alongside the emergence of additional reinsurance capacity in the form of sidecars, catastrophe bonds, and ILWs (industry loss warranties), may shrink demand for more traditional forms of reinsurance and retrocessional capacity, adding pressure for consolidation among existing reinsurers.”

For 2012, Conning says most P&C transactions involved small to mid-sized companies as targets. “The largest was Markel’s announced acquisition of Alterra, while Flagstone represented the other Bermuda-company transaction. Two of the 2012 property-casualty transactions involved Lloyd’s companies as targets, an increasingly scarce commodity,” says Conning.