NEW YORK (The Deal) -- Dealmaking in the insurance sector remains anemic but bankers are pointing to signs of an uptick.
An average deal value of $1.43 billion in the U.S. property and casualty insurance sector for the year to date lags the six-year average of $5.36 billion since 2006 before the credit crisis, according to financial data provider SNL Financial LC, while deal numbers at 27 are below an average of 33 over the same period.
Uncertainty over the economic outlook and an unwillingness to realize a fall in book values has caused dealmakers to sit on their hands.
But bankers point to the prospect of rising interest rates and the ongoing soft premium cycle as potential deal triggers. A soft market refers to one where stiff competition and excess capital make it difficult to push through premium increases. "In a softer insurance market M&A can be the catalyst to get scale, take out costs and increase geographic reach," Macquarie Capital managing director Dan Miller said. "A soft market can drive the M&A needle if organic growth isn't a lever."Deloitte Consulting actuarial, risk and analytics global practice leader David Foley notes that many buyers cannot meet the price expectations of sellers, which have suffered falls in book value. But he says potential buyers may increase their pricing in the absence of a bad catastrophe year. "You may now see more companies use excess capital to make acquisitions," he says. The last major catastrophe year was in 2011 when the Japanese tsunami and the subsequent damage to the country's Fukushima Daiichi nuclear power plant, U.S. tornadoes and Hurricane Irene, Australia's Queensland flooding and the New Zealand earthquake enabled insurers to bolster premium pricing. That meant a "hard market," which is traditionally linked to less deal activity as organic growth is easier to come by. Some pundits say the sector has not been in a soft market for a sufficiently long period to trigger further consolidation. Factors such as rising bond yields -- which depress the return on insurers' investment portfolios -- could also see them pursue other growth strategies.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV