AIG, Travelers seen among potential acquirers in P&C sector
Heightening merger and acquisition (M&A) activities and rising pricing are tailwinds to P&C stocks, according to Morgan Stanley analysts.
AIG’s $5.6 billion acquisition of Validus and media reports on Allianz/XL and SoftBank/Swiss Re have rekindled industry M&A activities.
Potential buyers could include US players such as AIG and Travelers, as well as international conglomerates from Japan or Europe. Topping the list of potential candidates for consolidation could include Bermudian reinsurers, as well as regional small-mid cap insurers, especially those that have worked to become pure-play P&C may be attractive to foreign companies seeking a foothold in the US.
While Jan 1 renewals’ property cat reinsurance rate increases of +5 percent were less than expected; Morgan Stanley expects further rate improvement at mid-year renewals.
Importantly, pricing gains have broadened to primary and casualty lines. Analysts estimate 1-5 percent net pricing increases could lead to around 6-29 percent higher earnings.
On the downside, higher interest rates and lower reserve releases are headwinds for the sector, according to Morgan Stanley. Rising rates depress P&C bond portfolio value and cause sector rotation to banks and life insurers. However, improving investment yields will eventually lead to higher P&C earnings and return on equity (ROEs). Reserve releases continued to slow in the fourth quarter of 2017, which adds pressure to future earnings.
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