Industry M&A may slow as high company valuation scares off buyers

Soaring valuations for insurance companies may limit the potential number of M&A transactions in an already historic year.

Insurance News

By

Just nine months in, 2015 has broken all records for insurance industry merger and acquisition activity. Total transactions have reached about $81 billion – double that of the same period in 2014.

While a combination of an influx of capital and low investment returns has made for a favorable M&A environment, experts have warned that soaring valuations for insurance companies may actually limit the number of transactions the industry can expect during the last quarter of the year.

In a piece written for the Wall Street Journal, Paul J. Davies warns that “deal fever…has made some investors delirious.” Currently, a rash of acquisitions by Japanese buyers – including the $5.4 billion deal between Mitsui Sumitomo and Lloyd’s insurer Amlin – has seen valuation of insurance companies jump to 2.2 times forecast tangible book value for 2015.

But “almost all are valued now as if they had a deep-pocketed Japanese buyer in the wings,” Davies wrote. “That is unlikely.”
Scarcity value has left just a few potential targets left for acquirers, all with high prices attached.

“The higher valuations go in the sector, the fewer the potential suitors that could justify a deal,” Davies explains. “Investors in the remaining Lloyd’s groups may have let the richest deals go to their heads.”

Some analysts have suggested the deals will allow the insurance industry to better face increased competition and lower prices. Others, however, have spoken out against the spate of deals in the property/casualty space.

While speaking to shareholders in late July, W.R. Berkley Corp. Chairman and CEO William R. Berkley told listeners that the consolidation is not warranted and is more the manifestation of “management ego” than an appropriate response to soft market conditions.

“Consolidation that is happening now is frequently about management ego or management rewards less than it is about what you need to run your business,” Berkley said.

W. Robert Berkley Jr., Berkley’s son and chief operating officer with the company, continued the critique, saying mergers and significant acquisitions leave carriers “distracted” from delivering true value to customers while they combat logistics and clashes of company culture.

Furthermore, the larger the merger, the more uncertainty the new company has over how to engage various distribution channels – including independent agents.

That leaves both agents and customers “disenchanted with their future and looking for an alternative,” Robert Berkley said.
The elder Berkley did make one exception to his censure – deals involving international corporations.

“To be a global company of scale is certainly of value, but that is a small part of dollars in that marketplace,” he said. “Our global ambitions have to do with serving great customers wherever they are located.”
 

Keep up with the latest news and events

Join our mailing list, it’s free!