US P&C segment has ‘sufficient capital’ to weather ‘moderate investment losses’; M&A uptick expected to continue

Written by Adam Cadle

12/01/2021

The overall P&C segment in the US has “sufficient capital” entering 2021 to weather “moderate investment losses” and a “continuation of elevated catastrophe losses”, the Kroll Bond Rating Agency (KBRA) has said.

In its latest sector outlook paper, KBRA said the P&C industry has a surplus of around $860bn. Investment income and realised capital gains (losses) are likely to be near a 10-year low however.

“The dual headwinds of availability/affordability of reinsurance as well as persistent low interest rates may pressure some insurers into M&A, offloading books of business or quota share arrangements, and needing to refocus on underwriting profitability,” the agency stated.

The second half of 2020 saw an uptick in P&C M&A activity, with some well capitalised industry leaders seizing the opportunity created by the pandemic turmoil, and this trends is expected to continue according to KBRA.

“The credit implications of M&A transactions are generally credit positive if the buyer is adding market share or profitable lines of business at a reasonable price (and if the transaction is financed in a credit-responsible manner),” KBRA underlined.

“Likewise, sellers can benefit by removing a distraction, or through management’s tighter focus on core businesses. Conversely, they can be viewed as credit negative if risk-adjusted capitalisation deteriorates, as well as execution risk with integrating operations, or if transaction financing weighs on the capital structure.”

The new year has already witnessed its first M&A deal, following Allstate’s announcement that it closed on the acquisition of National General Holdings Corp. Late in 2020, Zurich Insurance and the Farmers Insurance Exchange (Farmers) agreed to purchase MetLife’s P&C insurance division for $3.9bn.

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