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Valuation of Insurance Organizations

The M&A Market for P&C Insurers

Jeff Balcombe | May 1, 2014

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This article discusses the mergers and acquisitions (M&A) environment of the property and casualty (P&C) insurance industry and outlines recent market trends. This topic of discussion is an update to my previous publications in December 2010 and August 2012.

During the consideration of an acquisition or sale of a business, it is common to assess the multiples of publicly traded companies operating within the business's industry. Figure 1 graphically presents the average monthly forward price-to-earnings (P/E) multiples of domestic, publicly traded companies operating in the P&C industry.

Average Forward P/E Multiples, Monthly and 12 Months Ended

The recent downward trend in forward P/E multiples, based on the decline from the monthly average multiple for 2012, was likely influenced by several prominent industry trends as well as certain political and economic factors. Despite the downward trend, 2014 market multiples are in line with 2011 levels and still above levels observed from 2008 through 2010, indicating overall financial strength in the equity markets.

Overview of Industry Trends

The profitability of P&C insurers is, among other items, contingent on the frequency and severity of catastrophic events. Significant catastrophic events can reduce solvency of the affected companies and compel such companies to sell due to financial distress. Accordingly, financial performance and M&A activity within the P&C industry are affected by catastrophic events. In 2012, certain weather-related catastrophes, including Hurricane Sandy, which is estimated to have caused damages in excess of $50 billion, 1 resulted in significant losses across the industry. However, there were few significant catastrophic weather events during 2013, which improved the capitalization and financial health of P&C insurers and may encourage M&A activity during 2014. 2

Policy prices are also a potentially useful metric for assessing the condition of the industry. Demand for P&C insurance is somewhat insulated from macroeconomic conditions; the majority of P&C sales are associated with existing customers, a characteristic that implies reliance on renewals and facilitates price competition between providers. Premiums tend to oscillate between periods of price decreases and price increases (such conditions can be referred to as "soft markets" and "hard markets," respectively). Notwithstanding the various catastrophic weather events that occurred in the 5 years preceding 2014, the P&C industry has been operating under soft market conditions due to unfavorable economic conditions. 3 Though marginal rate improvements have occurred over the previous 2 years, evidence suggests that premium growth may not continue. While a soft market may be construed as a negative indicator of M&A activity, stagnant prices may encourage certain well-capitalized insurers to achieve economies of scale and revenue growth through consolidation. 4

Given the current competitive, soft market, insurers capable of exploiting targeted growth strategies such as the sale of new, innovative products or the successful entrance into new geographic markets are expected to achieve greater growth and efficiency. Companies seeking to take advantage of these growth areas and segments may be encouraged to engage in consolidation or look to acquire certain business lines.

Economic Factors

The P&C insurance industry is significantly influenced by interest rate fluctuations. The most recent data from the Federal Reserve reveals that corporate equities account for only 19.7 percent of the P&C insurers' assets, which indicates that the majority of the industry's assets are in fixed income securities. 5 The Federal Reserve's continued open market bond buying program has maintained interest rates at historically low levels, which has negatively impacted P&C insurers' ability to support claims liabilities and generate profits. Although a moving target as to precisely when, the Federal Reserve is not expected to increase the target rate until mid-2015. Insurers may turn to alternative investment options such as real estate, emerging markets, and commodities to stimulate investment income. 6 The success of these new investment opportunities could provide companies within the industry additional capital going forward and possibly stimulate acquisition activity. However, the failure of these riskier, alternative investments may dampen financial performance and place pressure on multiples due to a higher risk profile.

Additionally, the economic recovery within equity markets may dampen insurers' interest in raising capital through avenues such as private equity investment and M&A activity. Whereas, in 2010 through 2012, distressed insurers sought out M&A opportunities to dispose of certain business lines, the favorable outlook for the S&P 500 in 2014 may instead drive growth in the number of initial public offerings (IPOs) within the insurance industry. 7, 8 If these companies turn to the public markets to raise capital in the form of an IPO rather than seek out opportunities for consolidation or sale to equity sponsors, strategic and financial M&A activity could decline as a result.

Political Factors

Uncertainty for P&C insurers continues related to legislation and federal regulation. Regulations within the P&C insurance industry regarding capital adequacy requirements impact the level of capitalization necessary to support new insurance policies. The adoption of such regulations could potentially result in lower profitability and less capital available for deployment to new opportunities, as insurers would need additional capital to support existing revenue and growth in policy volume. Accordingly, many insurers may be hesitant to utilize excess capital for opportunities such as acquisition investment before these regulations are implemented and the related impacts are evaluated. 9

Furthermore, on December 12, 2013, the Federal Insurance Office released a report on opportunities for modernization of the regulation of the insurance industry. Increasing availability of personal demographic data may drive regulation to be both more specific and more binding in the future regarding the risk rating of policyholders. 10 Prior to congressional action being taken on such recommendations provided in the report, the insurance industry is not likely to see any direct impact; however, the report does suggest the likelihood of industry regulations increasing going forward.


As the soft market recedes, topline growth within the P&C insurance industry is projected at an annualized rate of 1.8 percent over the next 5 years to 2019. 11 If the financial health of large insurers continues to improve, industry participants may look to the M&A markets as a source of growth, especially as insurers are more capitalized following the low number of catastrophic events in 2013. Alternatively, uncertainty regarding the effects of regulation and investment income outside of fixed income securities on insurers' profitability could detract from the potential benefits of an M&A strategy in the current market. Additionally, strength in the equity markets may encourage companies to pursue an IPO rather than a strategic merger or sale. Given the factors noted above, considerable uncertainty exists regarding both the volume and pricing of M&A transactions going forward.


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1 US Department of Commerce, National Oceanic and Atmospheric Administration, Hurricane/Post-Tropical Cyclone Sandy, October 22–29, May 2013 Service Assessment.
2 "2014 Insurance M&A Outlook," Deloitte.
3 "IBISWorld Industry Report 52412 Property, Casualty and Direct Insurance in the US," IBISWorld (Apr. 2014).
4 "2014 Insurance M&A Outlook," Deloitte.
5 "IBISWorld Industry Report 52412 Property, Casualty and Direct Insurance in the US," IBISWorld (Apr. 2014).
6 "IBISWorld Industry Report 52412 Property, Casualty and Direct Insurance in the US," IBISWorld (Apr. 2014).
7 "IBISWorld Industry Report 52412 Property, Casualty and Direct Insurance in the US," IBISWorld (Apr. 2014).
8 "The Insurance Industry in 2014," PwC.
9 "2014 Insurance M&A Outlook," Deloitte.
10 "2014 Insurance M&A Outlook," Deloitte.
11 "IBISWorld Industry Report 52412 Property, Casualty and Direct Insurance in the US," IBISWorld (Apr. 2014).
12 Data obtained from Capital IQ.