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Insurance M&A activity sluggish amid economic uncertainty, high prices

Many of the drivers pushing consolidation in the insuranceindustry remain in place, but deal activity in the space remains .

Industry experts believe the environment has not beenconducive to M&A and that economic volatility, political uncertainty andthe low-interest-rate environment could be hampering confidence and causinginsurers to hold back on making deals.

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Total announced deal value among insurance underwritersplummeted to $713.5 million in the second quarter, down from $10.70 billion inthe year-ago quarter, while the number of announced transactions fell to 22from 31 during the same period. Transaction activity also slowed in theinsurance broker space with aggregate deal value declining sharply to $64.4million in the second quarter from $876.8 million a year earlier. Totalannounced deals dropped to 52 transactions, down from 99 deals in the year-agoperiod.

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Though deal activity has slowed, underwriters and brokersalike are experiencing conditions that could be more conducive to M&A.

The P&C space has been facing a in underwriting margins,with some lines showing slow premium growth, higher and declines in and . Industry experts believe highervaluation of companies has given buyers pause and adds to concerns over the lowM&A activity.

Aite Group analyst Jay Sarzen said some companies can"juice their growth" with an acquisition, but many potential buyersare hesitant to execute a deal because of pricing. "I think a lot of firmswould be willing to undertake some M&A, but the main thing that that theyare having to overcome is high valuations of companies," Sarzen said in aninterview.

People are "sitting on the sidelines" waiting forvaluations to come back down, said Matt Hutton, who leads the insurance M&Ateam for Deloitte Advisory. "There just may be a little bit of anexpectation gap between what sellers think that they are going to get versuswhat buyers want," he added.

ACELtd.'s acquisition of Chubb Corp. may have created some unrealisticexpectations.

"I think last summer when Ace bought Chubb it sent offa panic in the insurance industry that, if those two had to do it, theneverybody else is going to have to consolidate because that is the only way youwill be able to get scale," said Sarzen.

Ram Menon, who heads KPMG's insurance deal advisory practicein U.S. and the global insurance deal advisory practice for KPMG International,believes Asian acquirers that drove M&A activity in the U.S. in 2015 aremost likely trying to integrate their acquisitions after an active last year,but will return to the market as they still have an appetite for M&A.

"It seems quite likely the Asian insurers would want todiversify their global earnings and risk profile so they would look toacquisitions in the U.S. and in other places," said Menon.

Hutton added that some Chinese companies have slowed down asthey encounter capital issues both in the U.S. and from their domesticregulatory agencies.

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Activity in the insurance broker space continues to bedriven by big strategic players, and Hutton sees that continuing. He noted thatprivate equity sees this space as a "hot asset" and will pursue someof the larger transactions in the market.

Much like the P&C space, deal-making in the lifeinsurance industry is difficult because of market and general economicvolatility. The life insurance space also faces from the upcomingimplementation of the U.S. Department of Labor's Conflict of Interest FinalRule, commonly known as the fiduciary rule.

Deloitte's Hutton believes some life insurers that arebigger asset managers could get rid of their independent broker/dealers becauseof the Labor Department rule, but noted that these tend to be somewhat smallertransactions.

On the larger end of the M&A market, two deals announcedin 2015, AnthemInc.'s merger with CignaCorp. and AetnaInc.'s deal for Humana Inc., have faced significant regulatory . Challenges to deals havegiven leaders of other companies pause about executing large M&A deals,Moelis Vice Chairman Rick Leaman said at a Sept. 27 JMP Securities conference.  

"It is no question among CEOs and boards that large dealsare getting more regulatory scrutiny," Leaman said, pointing to thehealthcare space as an example.

Sarzen and Menon both expect activity to ramp up in 2017;Sarzen said the outcome of the U.S. election in November could ease publicsentiment regarding the business environment and contribute to deal activity.

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Aite Group's Sarzen thinks M&A will eventually increasebecause if companies continue to accumulate capital reserves, shareholders willget tense about "all their money sitting in the bank and not beingdeployed effectively."

Hutton sees the second half of 2016 has proven more activethan the first and believes some unique one-off deals could happen in theprivate mortgage insurance space. Insurance companies could make plays intoasset management and banking in the second half of the year as well, Huttonsaid.

"I think we are seeing things but they are somewhatunique assets and there are other transactions that are in market that are ofsize," added Hutton. "So itdefinitely feels like there are some people that were sitting on the sidelinesare becoming more and more active."

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