Six merger and acquisition announcements in the North American property/casualty insurance and reinsurance sectors in late 2014—and another global deal on the table—may herald a raft of deals in 2015, Fitch Ratings predicted.
Fitch analysts took inventory of deals that included:
- Shanghai-headquartered conglomerate Fosun International Limited buying Meadowbrook Insurance Group, a Michigan-based workers compensation and specialty program writer, for approximately $433 million.
- Bermuda reinsurer RenaissanceRe Holdings Ltd. acquiring Platinum Underwriters Holdings, Ltd. for roughly $1.9 billion.
- Progressive Corp. increasing its ownership stake in homeowners specialist ARX Holdings Corp. to approximately 67 percent from 5 percent for $875 million.
- ACE Limited’s announcement of the purchase of Fireman’s Fund’s U.S. high net worth personal lines business in a renewal rights transaction for $365 million.
- HCC Insurance Holdings closing a previously announced purchase of Producers Ag Insurance Group (ProAg) from CUNA Mutual Group (on Jan. 2, 2015) in a deal valued at roughly $110 million.
- Iowa-based mutual insurer Farmers Mutual Hail Insurance Co.’s buying John Deere Insurance Co., a fellow crop insurer.
“While a number of these recent merger and acquisition announcements are more modest-sized transactions, Fitch anticipates possibly larger merger activity in 2015,” Fitch said in Monday’s announcement, noting that if XL Group plc merges with Catlin Group Limited—to finalize deal discussions the groups confirmed on Dec. 17, 2014—then the combination would be a larger deal than other recently announced acquisitions. Catlin has operations in the U.S., the UK, Bermuda and internationally, and a market capitalization of approximately GBP2.3 billion ($2.9 billion).
Generally, Fitch says a combination of issues including limited organic growth and profit potential, unfavorable insurance pricing trends and intense market competition are all leading smaller, less diversified entities to assess strategic options. These same conditions are prompting large insurers growing capital levels “to pay a more meaningful premium for acquisitions.”
Sizing up the competitive dynamics in place throughout the property/casualty market, Fitch predicts near-term M&A activity in the property reinsurance, excess and surplus lines and medical professional liability insurance segments.
Fitch also offered the commentary on the latest deal—Fosun’s bid Meadowbrook—suggesting that the acquisition could be the first of several in the U.S. for the conglomerate which already has significant insurance operations in Portugal and China. Given Meadowbrook’s “niche product mix and distribution system, the potential for wider future growth in the U.S. market by Fosun would more likely be achieved by additional acquisitions.”
Fitch also noted considerable uncertainty regarding Meadowbrook’s turnaround efforts and the potential for future reserve volatility in Meadowbrook’s book, recalling that the company encountered significant losses related to adverse loss reserve development and a substantial goodwill writedown in 2013.
Meadowbrook also significantly adjusted its underwriting portfolio in 2014, Fitch said, noting that net written premiums declined by 15 percent year over year for the nine months ending Sept. 30, 2014.
According to the deal terms, Fosun is paying a modest premium to tangible book value reported at Sept. 30, 2014 and a 24 percent premium to the previous day closing share price, Fitch said, adding that Meadowbrook previously traded at a significant discount to book value.
Source: Fitch Ratings
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