In the latest edition of The Insurer TV’s analysis programme, Prospective, Pat Fels, head of FIG Americas at Goldman Sachs, said that while the “unquestionable” need for scale continues to fuel buyer M&A activity in the carrier space, another theme is growing in prominence.

“We’re seeing this theme of portfolio optimisation become more pronounced,” said Fels.

“CEOs, boards and investors are just being much more disciplined about looking at what are my winners and what businesses am I going to be in and [looking at] where I don’t have a competitive advantage or I can’t really exceed my cost of capital or I don’t have the dollars to invest in technology.

“Those are businesses that are better off divesting and focusing on the core and we’re definitely seeing that across really all sectors of insurance.

“We’re in a world where markets and investors and executives and boards are all supportive of M&A,” he said.

Jarad Madea, partner and co-head of TigerRisk Capital Markets & Advisory, reiterated this point, citing Argo’s decision to exit a number of lines to focus on its US specialty business as an example of this.

“I think we will continue to see right sizing of portfolios and focusing on optimising books of business,” he added.

“I expect there will continue to be a healthy level of M&A in the carrier space over the near term, whether that’s in the next year, in three years, five years or even longer,” said Madea.

Specifically for buyers, scale remains the key driver for M&A activity. Already in 2021, M&A headlines in the P&C space have been dominated by Chubb’s $65 a share proposed acquisition of The Hartford.

However, mega deals like this are only one feature of a desire to scale. TigerRisk’s Madea said for some companies, “it will largely take a portfolio management approach”.

“So, either growing firms seeking platforms, whether that’s one of the recent start-ups this past year who started in either Bermuda or Lloyd’s, or other sort of add-on type deals,” he added.

Hard market drivers

After a prolonged soft pricing market, there seems to be demand for companies in the P&C sector, as buyers and sellers alike understand that the current market pricing enhances their entities, and buyers – both strategic and financial – want to strike while the iron is hot.

According to a recent S&P Market Intelligence report, M&A activity for P&C underwriters was up year over year in the fourth quarter of 2020, rising to 22 deals from 19 in the prior-year period.


However, while speaking to TigerRisk’s Madea, who said the hardening market has a number of implications for M&A, he raised the point that some buyers may not feel the need to acquire to show growth, as like some sellers, they perhaps want to take advantage of the hardening factors if they see a good trajectory.

“When you look at it from a buyer’s perspective, I think management teams now see an attractive organic growth opportunity. They don’t need to acquire to show growth and healthy rates of growth, so the hurdle for acquiring I think has been raised because of the organic opportunities that they see.”

He added: “On the flipside, I think somebody who may have considered selling will see the same attractive growth opportunities and if they were stagnant before in terms of growth, they can now take advantage of those same hardening factors.”


Significantly, Madea said these dynamics can lead to an impact on valuations.

“If you look at carrier M&A valuations [in the last two years], in my mind they have really been bifurcated with a number of strong performers which have sold in the 2x to 2.5x tangible book value range, but then on the other end of the spectrum, we have seen a number of companies which have been more stressed sellers and those deals have been at or around tangible book value,” said Madea.


In contrast to the surging multiples insurtechs are being valued at, valuations remain sluggish in the P&C carrier segment. Madea puts this down to the hardening rates both buyers and sellers are enjoying, but exposure to the underlying earnings is also a factor.

“If you do have a well performing company [as a buyer] you’re not going to want to pay as high of a multiple if you can get that growth organically, so that’s why you’ve seen some of those buyers willing to pay around the book value multiple.

“Then again from the seller’s perspective, I think if you can see yourself on the other side of this [hardening] opportunity, then why sell for less if you could get a robust valuation in the 2x to 2.5x plus [at a later date],” said Madea.

However, underwriting risk and exposure to the underlying earnings is also a factor companies have been focused on, with uncertainty created by Covid-19 and unforeseen losses playing a role in impacting the appetite for M&A in the P&C carrier segment.

“Growth isn’t an area that [some carriers] have really been focused on and if they are, a lot of times those carriers will struggle with underwriting profitability,” said Madea.

“You also have to think about consistency and predictability of earnings, and a lot of the time, given those carriers are taking the underwriting result and exposure themselves, the underlying earnings are not very steady and predictable.

“You have Covid-19 losses, you have cat losses, you have a Texas winter freeze loss and there are other losses that people haven’t even thought about that are impacting those results.”

Click the link below to watch our latest edition of Prospective, which focuses on one of the industry’s most talked about topics – mergers and acquisitions (M&A).