Mergers and acquisitions could pick up among property and casualty insurance companies as stock values remain at record low levels, insurance prices remain soft, and many companies have accumulated cash stockpiles, an analyst said Thursday, The Associated Press reports.
FBR Capital Markets analyst Bijan Moazami said in a note to investors his review of the industry shows at least a few companies ripe for takeover.
His analysis focused on the financial incentives chief executives have for selling. They include stock holdings, potential change of control payments, and compensation information for the CEOs.
The most likely candidates are XL Group PLC, a Dublin, Ireland, diversified insurer operating in 27 countries, and Eastern Insurance Holdings Inc., a Lancaster, Penn.-based company focusing on casualty, worker’s compensation, and specialty reinsurance.
Moazami said his thoughts on XL Group are based in part on the political aspirations CEO Mike McGavick has shown in the past. McGavick was a candidate for U.S. Senate in 2006. He also would be paid a $16.6 million payout in the event of a sale, which includes cash severance, a bonus and stock options.
Eastern Insurance is an excellent candidate for an acquisition because of its attractive mix of business to companies seeking to increase market share in the Northeast, Moazami said.
CEO Bruce Eckert is 66 and would get a $2.5 million payout if the company is bought.
Insurers may be scouting around for acquisitions because a soft insurance market makes organic growth difficult unless a company is willing to cut rates, which hurts profitability, Moazami said.
“On the other hand, growth via acquisition allows for the renewal of policies at much more acceptable rates,” Moazami said.
Acquisitions often allow for cost cutting measures including staff cuts and more efficient business processes, which improve profit margins.
With stock values at low levels, acquiring assets below economic value is possible, making acquisitions attractive, Moazami wrote.
Shares of insurers were trading mostly lower in morning trading, following the downward trend of the broader market as investors sold stocks on the latest economic indicators suggesting only modest growth in the United States.
XL Group was down 17 cents at $20.25. Eastern was one of the few exceptions among major insurers showing an uptick. Shares rose 37 cents, or 3.6 percent, to $10.70.
Allstate Corp. shed 1 cent to $30.48, while Hartford Financial Services Group Inc. fell 23 cents to $22.74.
