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Valuation gaps could slow mergers, acquisitions in 2012: PwC


NEW YORK—Slumping valuations for insurance companies may dampen merger and acquisition activity in 2012, according to a report released Thursday by PricewaterhouseCoopers L.L.P.

The report, “Balancing uncertainty and opportunity: 2012 U.S. financial services M&A insights,” says valuation gaps have made many acquisition targets reluctant to sell. “Valuation gaps resulting from differences in buyers' and sellers' expectations of future profitability continue to present significant challenges to agreement on pricing and structuring and are preventing many potential buyers and sellers from consummating a deal,” according to the report. “‘Distressed' or ‘forced' sellers are still driving some deal activity; however, as global capital levels and market expectations begin to recover, the source of this deal flow seems to be limited to specific regions.”

One exception to the relative lack of M&A activity is in the broker sector, according to PwC. The report notes that there were 241 deals for insurance brokers in 2011, up from 215 in 2010.

But the relative lack of willing sellers means that many capital-rich insurers will need to find other areas for investment, PwC notes. “Many U.S. and foreign insurance companies have recapitalized over the last several years and have begun to return some of the excess capital to shareholders through stock buybacks and, to a lesser extent, dividend increases,” the report said. “Insurers will be evaluating whether to continue returning their excess capital to shareholders or to put their capital to use by expanding their core business though M&A.”

Another mitigating factor is regulation. The creation of the Federal Insurance Office in the U.S. and the pending Solvency II regulations in the European Union may temper M&A activity, according to PwC. “The potential new oversight of the Federal Insurance Office is expected to have further implications for insurance operations and costs as it adds an additional layer of oversight to the industry at the federal level,” the report states. “Interest in the U.S. M&A market by European investors appears to be on the decline, partially because of the uncertainty around whether Solvency II will impact the capital they will be required to hold at their foreign subsidiaries.”

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