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Insurance M&A valuations nearing cyclical highs, RBC investment banker says

At a time when several multibillion-dollar deals have recently been inked in the insurance industry, one observer says he believes that insurance M&A pricing is nearing its cyclical high.

"As our clients are seeing-double digit rate increases, in the specialty lines in particular, the valuation of M&A relative to putting capital to work within your own business has become more pointed," said Neil Chawhan, managing director in RBC Capital Markets' U.S. insurance investment banking division, during a panel discussion Oct. 15 at the Insurance M&A Symposium hosted by S&P Global Market Intelligence in New York.

In slower-growth personal lines and in particular among small to medium-sized property and casualty carrier, there is not much activity happening, said Craig Tessimond, managing director for Houlihan Lokey.

"Some overcapitalization and low ROEs are just driving valuations to a point where folks are just not willing to transact," Tessimond said.

Instead, there has been more activity in P&C niche specialty lines, where ROEs, margins and growth forecasts are higher, and which provide an entry point into specialty business for traditional carriers or other types of distribution businesses. These lines include non-standard auto, title insurance, pet insurance and dislocated property such as wind, hail and earthquake risk, Tessimond said.

Patrick Fels, who serves as Goldman Sachs' co-head for insurance Americas, said another hotspot has been in the accident and health and life distribution space. He listed Prudential Financial Inc.'s recent acquisition of Assurance IQ and Willis Towers Watson PLC's purchase of direct-to-consumer healthcare organization Tranzact as examples.

On the other hand, the broader life and annuity sector has seen an "unquestionable" slowdown in M&A activity, Fels said.

"Materially lower interest rates, even tighter credit spreads and the velocity at which that happened, it's had an impact," he said.

Fels noted that he ranks M&A activity for this line in three buckets. The first are deals that were at one time being actively discussed.

"For businesses that are really rate-sensitive, there was all of a sudden this disconnect between the buyers and the sellers," Fels said, adding that those deals were not likely to be completed "anytime soon."

The second category is people who were thinking about entering the M&A market. In general, Fels said fewer of these businesses will come to market.

Fels characterized the last bucket as people who are in no hurry to make a deal.

"There's just not an equilibrium that's been reached between buyers and sellers that relates to where we are today in rates and where they were and where people are willing to transact," Fels said. "That will take some time to reach an equilibrium, and then transactions will happen again."

In the long-term care space, Fels noted there have been very few deals year-to-date and said he would not expect to see a big pickup in activity.

"But it is pretty fertile ground if you think about the number of people that have long-term care blocks, [and] the pain it's inflicting particularly for the public companies that hold long-term care runoff blocks," Fels said. "Those are the ingredients that often make for transactions."

However, Fels added that there are very few counterparties and "very big disconnects" between what those counterparties are willing to assume as they price blocks and where the sellers might be.