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Guy Carpenter: Excess Stormy Weather Could Prompt P&C Insurers to Merge

Posted on 20 Mar 2012

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If 2012 is anything like 2011 in the amount of storms and resulting losses, property/casualty insurers may shrink in number, according to a new Guy Carpenter study.

Tornado activity this year so far is already high with 272 tornadoes, according to EQECAT. Last year, deadly twisters took the lives of at least 339 people, as more than 160 tornados ripped across seven states.

“If there are continued losses due to storms, the required payouts could deplete the capital base of insurers forcing them to merge or be acquired in order to stay in business,” said Chris Ezbiansky, head of mergers and acquisitions at Guy Carpenter (GC)   Capital’s Advisory Americas.

In addition to unpredictable weather, Guy Carpenter’s “Property & Casualty M&A Outlook for 2012” identified the implementation of Solvency II requirements in Europe and private equity-owned insurers as potential sources of increased merger and acquisition activity.

Although the SPDR S&P Insurance ETF (KEI), which tracks the performance of approximately 24 property/casualty insurers, is up more than 3 percent since last month, analysts warn the industry faces uncertainty.

In 2011, there were 71 domestic property/casualty M&A transactions totaling $13 billion, according to Guy Carpenter.

“We expect to see deal volume remain relatively consistent to prior years with a continued focus on small-to-mid-sized niche, specialty insurers,”

Ezbiansky told Insurance Networking News. “Larger companies are looking to acquire unique underwriting platforms that either complement their existing book of business or allow them to expand geographically and into new lines.”

In response to the implementation of Solvency II regulations, the “2012 Guy Carpenter Outlook” reports that European financial services companies could consider strategic alternatives for non-core insurance and reinsurance operations to clean up their balance sheets for use in run-off sales.

“After submitting to capital testing, European owners of insurance companies may choose to divest or sell their non-core assets. Since European insurance offices in America are not viewed as core, they could be sold,” said Ezbiansky.

Although many private equity funds invested in insurance underwriting businesses five to eight years ago, increased transaction activity around private equity-held insurance assets is likely to occur as private equity funds’ portfolios mature.

“Private equity fund managers haven’t seen the exit opportunities they anticipated so they may sell if they can’t find a way to monetize,” Ezbiansky said.

Overall, mergers and acquisitions are not all bad news.

“There’s opportunity for well-run, profitable, niche businesses,” concluded Ezbiansky.