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US, Bermuda insurance M&A activity forecast to rise by nearly 150% in 2018

The announcement of 10 multibillion-dollar deals during the first three quarters of 2018 will drive a 149.5% year-over-year increase in the aggregate value of insurance carrier mergers and acquisitions for the full year, S&P Global Market Intelligence projected in a presentation delivered Oct. 17 at the 9th Annual Insurance M&A Symposium.

Click here to access the PowerPoint slides from S&P Global Market Intelligence's presentation. Click here for historical data exhibits.

Axa's $15.39 billion agreement to acquire XL Group Ltd. represents the largest of those transactions by a wide margin. But activity has been sufficiently robust, particularly in the property and casualty sector, that the projected full-year tally would still mark an increase of 62.7% when excluding that blockbuster transaction.

The projection represents the sum of actual announced deal activity meeting certain specified criteria through the first nine months of 2017 plus the average of the aggregate announced transaction values in the fourth quarters for the previous 10 years.

Consolidation involving Bermuda-based companies, the pursuit of return-enhancing block transactions involving runoff business, acquisitions of technology-focused entities, and a desire to add new capabilities and geographies have all served as drivers of consolidation in 2018. Robust industry capitalization and the tailwind provided by U.S. federal tax reform have made the decision to pull the trigger easier. At the same time, several speakers at the conference warned of the potential for "frothy" relative valuations and increasingly lofty seller expectations to dissuade some prospective acquirers.

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A majority of the billion-dollar deals have come from the P&C sector to date in 2018, but Titus Leung, a partner in the advisory practice of Perella Weinberg Partners, said during the conference that activity in the life business has "never been busier." Leung observed that he has been "impressed by the number of parties out there looking" for a wide range of life liabilities. Certain of those transactions, depending upon the manner in which they are structured, may not be fully captured by the insurance M&A statistics, and our outlook incorporates that caveat.

Athene Holding Ltd. President William Wheeler, also speaking during the conference, echoed those sentiments as he predicted that sellers' need and desire to restructure their balance sheets will cause M&A activity to accelerate. That process, he said, is "in the middle innings at the latest."

A variety of other factors also support continued consolidation in both the near and longer terms. Among them are the challenges that smaller and midsize carriers face keeping pace with larger competitors in terms of product design, underwriting and distribution, not to mention the need to enhance technology and improve customer-facing functions in an industry that is often viewed as ripe for disruption.

Scale matters

There were more than 1,300 P&C insurers in the U.S. that either existed as independent, stand-alone entities or filed a combined annual statement with the NAIC in 2017. Though that number is down by nearly a quarter since 1996, there has been an ebb and flow over time to the number of carriers that operate in this country: new carriers have emerged to provide capacity in geographies and business lines from which larger, established companies retreated. Coastal property markets and certain long-tail casualty niches come to mind.

On the life side of the business, the rate of consolidation is even more compelling. There were just over 700 individual life entities that filed annual statements last year. That represents less than half of the number that did so in 1996. And among the companies that remain, more of the business has become concentrated within the largest entities.

In 1996, the largest 20 individual life entities accounted for 20.9% of the industry’s overall direct premium volume. By 2017, the share held by the top 20 entities had soared to more than 55%, and that figure is down a bit from the not-too-distant past. When we limit the scope to first-year premiums and single-premium business, the change in share for the largest entities over time is not as dramatic. But the largest 20 companies control even more of the market.

The P&C industry has not seen the same sort of consolidation of business within the largest 20 groups across the board as the life sector. But the concentration of market share among the largest entities has been especially pronounced in certain key lines. The top 20 private auto writers accounted for 68% of the business in 1996, for example. That number increased to nearly 83% in 2017. And virtually all of that growth has been concentrated among the top 10 writers.

The 10 largest private auto insurers accounted for more than 72% of the premium volume in 2017 as compared with less than 57% in 1996 as lower-cost providers like Berkshire Hathaway Inc.'s GEICO Corp., Progressive Corp. and United Services Automobile Association have each gained considerable ground. Smaller auto-focused carriers face challenges not only in fighting to preserve their market shares but also in keeping losses and operating expenses in check as larger rivals develop and implement technologies to enhance rating, underwriting and claims-handling functions.

Joseph Beebe, managing director and group head of insurance investment banking at Keefe Bruyette & Woods, said during the conference that he has been surprised that there have not been more sales by smaller companies. He predicted, however, that "a lot of companies will need to sell" over time based on their declining market relevance relative to larger, growing competitors. Sandler O'Neill & Partners Managing Director John Hendrix said that some smaller companies do not have an immediate need to sell, but he predicted that they will "eventually face their day of reckoning."

Valuations rising

The most recent of the billion-dollar deals — Western & Southern Financial Group Inc.'s September agreement to acquire Gerber Life Insurance Co. — may carry implications for future transactions both in terms of what the transaction involved and the level at which it was priced.

S&P Global Market Intelligence values that transaction well over 5x Gerber Life's June 30 capital and surplus both with and without consideration of the asset valuation reserve. The average multiples for sales of U.S. life companies with $100 million or more in surplus at the time of a deal's announcement since the start of 2012 on the same bases were less than 1.5x.

The Gerber Life deal notably includes a platform and long-term licensing agreement to facilitate new business production. While that might help explain the higher relative price, Wheeler said he viewed the deal as having a "big price."

On the P&C side, the price to tangible book multiples of 2.0x that Axa agreed to pay for XL and 1.8x in American International Group Inc.'s agreement to buy Validus Holdings Ltd. also served as discussion points during the conference. The average multiple on $1 billion-plus deals involving P&C and multiline targets in the U.S. and Bermuda from 2012 through 2017 was 1.5x. The higher valuations for Bermuda-based companies puts pressure on acquirers to generate synergies to justify the control premiums they are paying, said Deloitte Managing Director Doug Sweeney during the conference.

Higher prices have not, by and large, kept transactions from getting done as our outlook suggests. But it may be discouraging at least some active players from pursuing transactions.

"Our feeling," said Wheeler, "is that this isn't the right time to stretch."

Actual and projected results referenced in this article and accompanying slide presentation include deals involving U.S.- and/or Bermuda-based buyers or targets for which financial consideration has been publicly disclosed. Terminated deals and transactions involving targets in the managed care sector are excluded. So, too, are transactions in which targets are classified as brokers and agencies. Certain block transactions executed via reinsurance without the sale of a legal entity are not considered in the actual or projected results. The methodologies employed by other S&P Global Market Intelligence summaries of historical M&A activity may differ.