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Recession, election year fear expected to impact US insurance M&A

Fear and uncertainty around the 2020 election and a potential recession are likely to have an impact on the state of insurance M&A, according to panelists at S&P Global Market Intelligence's Insurance M&A Symposium.

For M&A to take place, CEOs must have confidence and boards and management teams have to be able to "act with conviction," said Patrick Fels, who serves as co-head of insurance Americas for Goldman Sachs. Fels said the backlog for M&A business across all industries and the globe seems stable, but he warned that the impending election could cause that to "slow down" as people take more of a "wait and see approach."

"With some of these looming uncertainties, it's hard to think that doesn't impact some larger strategic thinking and transactions," he said.

In an alternate scenario, Fels said he could also foresee some increased activity for certain types of transactions that businesses might try to get done in advance of the election.

"In the bank sector, I can certainly imagine transactions trying to get done before the election, and you could see that to some degree in the insurance industry as well," Fels said.

John Hendrix, a managing director for investment banking at Sandler O'Neill & Partners, added that he would not be at all surprised to see an acceleration of sale activity in the insurance brokerage market going into the election. He noted that increased activity was seen in this space leading up to all the election years since 2008.

"There's obviously a pretty significant difference in tax rhetoric between the Republicans and the Democrats right now," Hendrix said. "If business owners are looking at a potential change of party in 2020, that could really accelerate the desire to sell and lock in lower capital gains rates."

Two potential paths for post-election insurance M&A

There are several dynamics affecting the industry, such as technology and a close consumer focus, that will continue to persist regardless of who is in the White House, said Neil Chawhan, managing director for RBC Capital Markets' U.S. insurance investment banking team.

Hendrix also identified two potential paths for insurance M&A following the 2020 election.

Should a Democrat win the White House, Hendrix said there would be a lot of fear around the possibility of "wholesale change" in terms of tax regulations and spending, but he thought those fears would prove to be "overblown."

"In a Democratic environment, you're going to see six months of fear that trends downward to more of a status quo," Hendrix said.

Fels added that a lot of sentiment could hinge on whether the Republicans are able to hold onto their Senate majority.

"If they don't, then I think that fear becomes pretty pronounced," Fels said.

On the other hand, if Donald Trump were to be re-elected, Hendrix said he expected it would be "business as usual," meaning a continued low tax regime, a limited regulatory regime, and "very little" coming out of Congress.

"Those things all presumably continue to drive a more or less status quo M&A market," Hendrix said. "The big wild card there is the direction of the economy."

Recession risk

Although a low-tax environment is generally perceived as helpful, Hendrix pointed out that the economy has been "somewhat long in the tooth in terms of the rally" and said it was likely to slow down no matter what.

"Any process we're running now has to include some type of downside recession case," said Craig Tessimond, managing director for Houlihan Lokey. "We're so long into this bull market that it would be irresponsible to say things are just going to keep going up."

Tessimond added that during the last crisis there were plenty of insurance services businesses that "came out fine" and ultimately grew their market share and generated decent returns.

"If we find a good business with good management that has reasonable downside protection and a chance to pick up share on the other side of the market, we're going to buy that business," Tessimond said.

Fels added that certain insurance sectors could be at greater risk than others.

"If there's a real seismic shift in the economy; further decline in interest rates, sell-down in the equity market, that's going to impact life and annuity more than the P&C sector probably," Fels said.

With regard to specialty health insurers, Chawhan said there have been a lot of "question marks" as to what the profiles of those businesses are going to be like in the future.

"Certainly, we've seen a lot of hedging in terms of some of our clients determining whether or not to pull the trigger," Chawhan said.