For Non-Life Insurers, It's 'All About M&A Now,' Barclays Proclaims

In a report published Thursday, Barclays analyst Jay Gelb mentioned that although a modest book value decline and weakening prices were expected for the P&C insurance stocks, investors are likely to focus on “the next potential P&C M&A transaction.”

Against the backdrop of a tough P&C environment, Barclays said its “favored P&C stocks” were:
Allstate Corp ALL and Marsh & McLennan Companies, Inc. MMC - in view of their “persistent strong results
American International Group Inc AIG and Hartford Financial Services Group Inc HIG – due to their “prospects for significant share buybacks at attractive valuations”
BRK Inc BRKK – given its “exposure to an improving economy along with accretive acquisitions”

Referring to primary commercial P&C, analyst Jay Gelb recommended “high-quality specialty companies” such as ACE Limited ACE and Arch Capital Group Ltd. ACGL.

In the report Barclays noted, “In 2Q, we model a 1.3% median decrease in linked-quarter book value for the P&C (re)insurers driven by solid core underwriting results, offset by challenged investment results and elevated spring weather losses.”

Gelb expects BRK, AIG and XL Group plc XL to generate the most solid linked-quarter book value growth, at above 2 percent. Allstate, Aspen Insurance Holdings Limited AHL and Chubb Corp CB are expected to record the highest declines due to “negative mark-to-market valuations on investment portfolios.”

ACE has recently announced the proposed takeover of CB for $28bn. ACGL does not appear interested in large-scale M&A, since it is focusing on “generating attractive ROE in commercial P&C insurance and reinsurance than on its premium volume,” Gelb said, while adding, “Our sense is recent defensive M&A activity could continue to put pressure on Aspen to consider strategic alternatives following its successful defense of a hostile takeover by Endurance.”

Barclays maintained an Overweight rating on Allstate. Gelb reiterated an Equal-Weight rating on Chubb, while raising the price target from $98 to $125.