Financial buyer appetites for specialty insurance deals may start waning this year—not just because of the current credit crisis, but also because the insurance market is softening, an insurance company executive said recently.
“We haven’t gotten to the soft part of the cycle. We’re just getting there,” said Mark Watson, chief executive of Argo Group International Holdings Ltd., during a panel discussion about private equity buyer appetites at the midyear educational conference of the Kansas City, Mo.-based National Association of Professional Surplus Lines Offices Ltd., held last month in Scottsdale, Ariz.
Mr. Watson made his observation after Matthew Kelty, a principal for Allied Capital Corp., a Washington-based PE firm, said his firm’s understanding of the dynamics of insurance markets makes this a good time to be a buyer, giving his firm an edge over other generalist PE players that might be scared off.
In addition, “it’s much better [now] as an investor to be able to evaluate how a company has done over a few years of a very soft market,” contrasting the 2001-2003 time frame, “when the rising tide lifted every boat.”
Still, the soft market is far from over, Mr. Watson suggested. “There’s so much capital, and therefore capacity in our industry today that a $50 billion loss that was fairly catastrophic only a few years ago really doesn’t change much today,” he said.
Insurers are also much better at managing and pricing their risks, with better tools and data available than a few years ago. “But then there’s this thing called the market. The market price is the market price,” he said, predicting there will be little difference between this cycle and past ones.
“Until a large amount of capital comes out of the marketplace for one reason or another, prices are going to continue a precipitous decline for another couple of years,” Mr. Watson predicted.
Separately, during an interview at the NAPSLO conference, Alan Kaufman, CEO of Burns & Wilcox—a Farmington Hills, Mich.-based wholesaler and MGA—also predicted that as the market changes, the attitudes of these financial buyers will change with it.
Right now, “it’s still a sellers’ market. There’s still a big demand, but the demand has decreased,” he said. “The longer the forecast is for this softening market, as the performance of competitors declines, demand will decrease also.”