CHICAGO--(BUSINESS WIRE)--Acquisition activity in the North American property/casualty (re)insurance market picked up in fourth-quarter 2014, which may portend further deals in the coming year, says Fitch Ratings. Limited organic growth and profit potential amid unfavorable insurance pricing trends and intense market competition are leading smaller, less diversified entities to assess strategic options. These conditions are also prompting larger insurers that have experienced recent strong capital expansion to pay a more meaningful premium for acquisitions.
Given the market's competitive dynamics, those segments that Fitch believes are more disposed to acquisitions in the near term are reinsurance (particularly property reinsurers), excess and surplus lines writers, and medical professional liability insurers.
Among recent insurer acquisitions was that of Shanghai-headquartered conglomerate, Fosum International Limited, buying Michigan-based workers compensation and specialty program writer Meadowbrook Insurance Group (MIG) for approximately $433 million.
Fosum has significant insurance operations in Portugal and China, as well as other industrial, investment and asset management operations. The acquisition represents Fosum's first acquisition in the U.S. market. Given MIG's niche product mix and distribution system, the potential for wider future growth in the U.S. market by Fosum would more likely be achieved by additional acquisitions. Considerable uncertainty regarding the company's turnaround efforts remain, particularly tied to MIG's long run competitive position and future potential reserve volatility.
The purchase price of MIG represents a modest premium to tangible book value reported at Sept. 30, 2014 and a 24% premium to the previous day closing share price. The company previously traded at a significant discount to book value. MIG encountered significant losses in 2013 related to adverse loss reserve development and a substantial goodwill writedown. The company also significantly adjusted its underwriting portfolio in 2014. Net written premiums declined by 15% year over year for the nine months ending Sept. 30, 2014. MIG returned to a net profit of $21 million in the first nine months of 2014 versus a $100 million net loss in the same period for 2013.
A number of recent acquisition announcements have centered in the reinsurance, personal lines and crop insurance segments. On Nov. 24, 2014, Bermuda reinsurer Platinum Underwriters Holdings, Ltd. announced that it was being acquired by Bermuda peer Renaissance Re Holdings Ltd. for approximately $1.9 billion. Pricing in reinsurance, particularly in the property/catastrophe business, is characterized by falling premium rates amid recent favorable loss experience and growing competitive pressure from alternative markets such as securitizations and hedge fund backed providers.
In personal lines, the homeowners segment has attracted more acquisition interest. The Progressive Corporation (PGR) announced on Dec. 16 that it was increasing its holdings in homeowners' specialist ARX Holdings Corp. to approximately 67% from 5% for $875 million. This transaction will promote PGR's efforts to provide bundled automobile and homeowners' coverage to its customers. This was followed on Dec. 18 by Ace Limited's announcement of the purchase of Fireman's Fund's U.S. high net worth personal lines business in a renewal rights transaction for $365 million, which will complement Ace's existing Ace Private Risk Services operations.
In crop insurance, HCC Insurance Holdings closed its previously announced purchase of Producers Ag Insurance Group (ProAg) from CUNA Mutual Group on Jan. 2, 2015, a deal valued at approximately $110 million. This deal closes on the heels of the Dec. 18 announcement by Iowa-based mutual insurer Farmers Mutual Hail Insurance Co. that it was buying John Deere Insurance Co. Crop., a fellow crop insurer. Crop underwriters have faced more operating challenges in the last two years due to weather-related events and the evolution of government reinsurance programs.
While a number of these recent merger and acquisition announcements are more modest-sized transactions, Fitch anticipates possibly larger merger activity in 2015. XL Group plc confirmed on Dec. 17, 2014 that it was in preliminary discussions with Catlin Group Limited regarding a transaction combining the two companies. This transaction, if consummated, would be a larger deal than other recently announced acquisitions as Catlin has operations in the US, the UK, Bermuda and internationally, and a market capitalization of approximately GBP2.3 billion.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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