The insurance industry will see a pickup in mergers & acquisitions (M&A) activity in 2010, according to Tony Ursano, CEO of Willis Capital Markets & Advisory, a unit of Willis Group Holdings.
Ursano made his forecast at an industry event at The Willis Building in London on Sept. 3. He indicated that the soft market is fuelling the search for growth, diversification and specialization, which can be achieved through M&A.
Ursano believes there are a number of factors driving companies to look for mergers and acquisitions. He cited the fact that the size and scale of insurance companies is becoming increasingly important for rating agencies, investors and clients. M&A would also satisfy the pent-up demand for liquidity from private equity owners.
However, he indicated that so far in 2009, insurance M&A volume has been light, with deals completed at an average price of 1.09 times book value. This is in contrast to specialty insurance M&A transactions that took place before the financial crisis. Their average price was 2.46 times book value.
“As markets stabilize, valuations boost confidence and acquisition financing capacity and terms improve, we expect to see a significant increase in M&A activity in the insurance space,” Ursano told 375 delegates at The Insurance Insider’s Pre-Monte Carlo Rendez-Vous Executive Briefing.
However, he took pains to remind his audience that, “while the outlook is positive, we must bear in mind that more than 50 percent of insurance deals have failed to create shareholder value due to a number of factors, including difficulty assessing the profitability of the target, the cyclical nature of the insurance market and the volatility of the financing markets.”
Ursano noted that a successful M&A has to be first of all “financially and strategically compelling.” He cited Ace Limited’s successful M&A strategy as an example. “Insurance companies looking to acquire should first ensure that the deal is accretive to earnings, return on equity and book value per share,” he advised. “There should be clear, defensible strategic logic behind the acquisition, transparency of loss reserves and committed financing upfront. It’s also important that key management are given appropriate incentives to stay.”
In Ursano’s opinion the soft market may be changing. “We are one event away from a hard market,” he stated. One of the main factors that could push the market in that direction is the ongoing pressure on “profitability and returns,” coupled with “major investment losses and reduced investment income in the insurance world, with valuations at all-time lows.”
He pointed out that “more than 50 insurance and reinsurance companies are trading at below their stated book value. Under these circumstances, a significant investment or catastrophic loss would catapult the industry into a hard market.”
Ursano also predicted an increase in sidecar and cat bond activity, and an increase in ILS fund formation in 2010 fuelled by the light catastrophe losses so far this year, which could drive strong investor returns in an attractive, uncorrelated asset class. This, coupled with financial market stability, could increase hedge fund participation.
Source: Willis Group Holdings – www.willis.com
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