M&A Activity

PE Firms Target P&C Insurers

An M&A uptick won't impact insurance pricing right away.
By: | August 4, 2014

Experts are predicting a continued uptick in merger and acquisition activity within the property and casualty insurance marketplace, particularly by private equity firms and alternative asset managers. But it’s unclear whether more PE firms entering the sector will impact risk managers.

Nearly three-quarters (71 percent) of surveyed insurers, reinsurers and bankers that have worked on insurance M&A transactions said that alternative asset managers and/or private equity firms will be among the most active buyers within the P&C sector over the next 12 months, according to a report published this spring by the Mayer Brown global law firm, and published in association with Mergermarket.

Within the P&C sector, prices are generally based on supply and demand, typically rising after a large catastrophic event, said Edward Best, a partner at Mayer Brown and co-leader of the firm’s capital markets and financial institutions groups.

The greater the consolidation, the lower the supply and — theoretically — prices could get lower, he said.

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“But the P&C market is so large, that the opportunity for private equity firms to consolidate the market could be very tough,” Best said.

With that said, however, PE firms do try to push efficiencies into the companies they buy, which could help the P&C industry drive down costs, he said.

Robert Hartwig, president of the Insurance Information Institute in New York, agreed that longer-term pricing could theoretically improve if PE firms created large insurance companies by consolidating disparate operations and realizing efficiencies through economies of scale.

“I would suspect that could happen within three to five years, but it would take a while to piece together an insurer of that magnitude,” Hartwig said.

PE firms have been investing in the P&C business for many years, but that activity was interrupted by the financial crisis in 2008, said Sean McDermott, a director at Towers Watson in Philadelphia.

“Now, a lot of PE firms are sitting on a pile of money that they have to either invest or return to investors,” McDermott said.

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]