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By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®

Property/casualty insurance executives and bankers are eyeing the horizon for possible mergers-and-acquisitions activity in 2010, and despite the current choppy financial and insurance markets, deals could get done.

"Not as long as I have anything to do with this," responded Robert S. Schimek, chief financial officer of Chartis, to a question from an interviewer at the 21st Annual Executive Conference for the Property/Casualty Industry, this past Thursday morning in the classy New York Palace Hotel.

Schimek also discussed the possibility that parent company AIG would do an IPO with Chartis, its global general insurance operation. Schimek said that the market would ultimately dictate what would happen with Chartis. In the meantime, he described how the insurance company was doing a GAAP audit of itself (the first time it's ever been done), which would allow Chartis to receive a credit rating and access credit markets on its own.

The CFO estimated that Chartis makes up 15 percent to 16 percent of AIG's total assets yet generally represents as much as one-third of the overall revenues of the parent company. In terms of total U.S. equity, Chartis comes in at about $40 billion, the parent company at $70 billion.

M&A OVERALL

Perhaps one of the biggest optimists you can talk to about the potential for insurance sector M&A is banker Eric Bishof, managing director at Morgan Stanley.

"Excess is capital is back more or less," he reported, adding that acquirers can find funding in both the debt and equity markets if they're viewed favorably.

"The facts already indicate that deals can get done," concurred W. Marston "Marty" Becker, chairman and CEO of Max Capital Group Ltd. and someone who is familiar with recent acquisition activity.

We are also approaching a dicey time in the earnings cycle for P/C insurers. The market could still be forever softening in 2010, with the power to lean on past-year reserves ebbing, leading some insurers to get desperate for growth. This also could drive M&A activity.

"We're at an inflection point," warned Frederick H. Eppinger, president, CEO and director of The Hanover Insurance Group, who foresees a pickup in M&A activity in the next 18 months. "No question."

Consolidation could be driven thanks to smaller companies being battered in particular by the recession and market conditions, and larger companies (particularly those in Bermuda) looking to diversify by buying other companies' books, according to Eppinger.

THEN AGAIN ...

Whatever the reason for M&A, historically, seven out of 10 times it doesn't work in insurance, warned Eppinger.

Still, he and Becker are optimistic that, at this current inflection point in the market, buyers and sellers will be more thoughtful and rational, or as Becker put it, more focused on the "afterlife" of a deal.

That is, if deals do indeed happen in 2010. The equity markets at the moment are very expensive, and the credit markets raise ratings issues, as Becker explained. Sure, foreign and mutual carriers have the cash for deals still.

But financial buyers, like private equity and hedge funds, are much more hesitant these days, said Bishof.

"It's not a jump-in type of environment," said Michael J. Fallon, senior vice president and chief financial officer at Liberty Mutual Agency Markets.

Fallon, Becker, Eppinger and Bishof all spoke at the executive conference in New York City, sponsored in part by Ernst & Young.

November 13, 2009

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