Goldman Sachs Upgrades Property & Casualty Insurance On M&A Upside, Prefers W. R. Berkley To Validus And Arch Capital

In a report published Wednesday, Goldman Sachs analyst Michael Nannizzi raised his Property & Casualty Insurance coverage to "Neutral" from "Cautious" as more M&A transactions are "likely." "M&A is not only a risk, but a function of challenging fundamentals as companies seek M&A as a tool to enhance earnings or relevance in a market where strategies to grow organically carry too much risk," Nannizzi wrote. "Thus M&A could bolster shares further despite headwinds from deteriorating fundamentals and the potential for higher interest rates." Nannizzi continued that one "common incentive" for companies to engage in M&A transactions is the desire to "offset the headwinds to growth and earnings" given the sector's "challenging" outlook which includes expected commercial price declines in 2016. The analyst added that company valuations tend to correlate directly to pricing activities but the market typically rewards M&A activity with higher stock prices. As such, the incentive for companies to pursue M&A activity has "only increased."

According to Nannizzi,

is an "attractive" M&A candidate given its "pure specialty focus" along with its lack of reliance on brokers for distribution and a high tax rate that could provide a "straightforward lever" for an acquirer to create value. As such, shares were upgraded to Buy from Neutral with a price target raised to $61 from a previous $51. On the other hand, Nannizzi downgraded shares of

to Sell from Neutral with an unchanged $62 price target given its "peer-high valuation" and the belief that the company is unlikely to sell itself to an acquirer. Finally, the analyst upgraded shares of

to Neutral from Sell with a price target raised to $42 from a previous $37 given the view that M&A activity "is most likely" to involve companies with market caps below $5 billion. Validus' is also attractive given its Lloyd's syndicate that provides value in addition to its core reinsurance book.