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Insurance M&A struggles to keep up with 2015's record pace

Anearly insurmountable comparison to a record 2015, in combination with economicvolatility and political uncertainty, has contributed to a sharp year-over-yeardecline in the aggregate value of insurance M&A deals, panelists saidduring a recent S&P Global Market Intelligence webinar.

Aggregatedeal value of S&P Global Market Intelligence-covered transactions involvingthe sale of property and casualty or life-and-annuity insurance carriers and/ortheir assets by U.S.- or Bermuda-based buyers and/or sellers fell short of $4billion on a year-to-date basis through Sept. 22. That figure jumps past $7.4billion when including ArchCapital Group Ltd.'s $3.4 billion August agreement to mortgage guaranty writerUnited Guaranty Corp.In either case, the figure represents only a small fraction of the more than$65 billion in activity recorded during the year-earlier period when applyingthe same criteria, led by the $28.24 billion merger agreement that resulted in theformation of Chubb Ltd.

BorisLukan, who leads the U.S. insurance M&A and restructuring practice forDeloitte Consulting, said macro factors have contributed to the decline inaggregate deal value.

"Uncertaintyincreased pretty dramatically over the first several months of the year, andthat dampened investor confidence," he said during the webinar. "Itbecame substantially more difficult to predict the timing and magnitude ofinterest rate increases."

Additionalreasons for the slowdown, he said, include a sidelining of some of the Asianinvestors that ranked among the most active players in 2015 as a result ofdevelopments such as questions raised by regulators and the relative strengthin the U.S. dollar, as well as a near-term focus by some industry consolidatorson integration. Plus, Lukan said, valuations may be viewed as more rich thanthey were a year ago. He added that those valuations are "not rich byhistorical standards, but still full."

NicholasPotter, corporate partner at the firm of Debevoise and Plimpton, said theNovember presidential election may be playing some role in the sluggish pace ofactivity.

"Untilwe have clarity … that might be one of the reasons we're not seeing biggerdeals at this point," he said. "Nobody's not going to do a deal thatmakes a ton of sense simply because we don't know who's going to be the nextpresident. On the other hand, as we all know, there's a lot of work that goesinto planning any deal — bigger ones especially — and having this type ofuncertainty is not very helpful as they think about what their strategy isgoing to look like."

Headlinesinvolving insurance M&A have emerged in recent days, led by of 'ssale of itsinterests in Ascot UnderwritingHoldings Ltd. and Ascot Corporate Name Ltd. to .

Publishedreports also discussed efforts by The Hartford Financial Services Group Inc. to sell itsTalcott Resolution runoff U.S. variable annuity business. Bloomberg Newsreported that Berkshire HathawayInc., the Canada Pension Plan Investment Board-owned ,J.C. Flowers & Co.LLC and Apollo GlobalManagement LLC were among the parties that had expressed interestin the business. An Apollo Global Management unit serves as investment managerfor life and annuity company Athene Holding Ltd., one of a number of companies in theP&C and life-and-annuity sectors that have expressed interest inprospective acquisitions.

Webinarattendees expressed optimism that activity would accelerate in 2017 from therelatively light levels of dealmaking from a dollar-value perspective that hasoccurred to date in 2016. A substantial majority of audience members polledsaid they believe M&A activity will increase either modestly orsignificantly next year.

Inthe meantime, the completion of the several billion-dollar-plus deals in theindustry during the past 11 months, highlighted by the January close of the ACEand Chubb merger, has heightened the focus on the integration process.

JosephMilicia, M&A practice leader for the Americas at , spoke during thewebinar on risks and best practices associated with due diligence andintegration. He recommended that acquirers develop a "strong vision"for how the integration process will play out and begin to implement thatvision even before the deal is announced. He also emphasized the importance ofmaking cultural integration a priority from the start.

"Asuccessful cultural integration will have a huge impact on employee as well ascustomer retention," Milicia said.

Thewebinar served as a preview of S&P Global Market Intelligence's 7th AnnualInsurance M&A Symposium on Oct. 19 and 20.