France’s AXA S.A. (CS FP), Europe’s second largest insurer, is acquiring XL Group Ltd. (XL) for $15.3 billion, or $57.60/share, to become the world’s largest property & casualty insurer. This is the second large insurance deal this year after American Intl. Group (AIG) announced it would be buying reinsurer Validus Holdings (VR) for $5.6 billion, or $68/share, in late January. These two deals may be a prelude to further consolidation in the industry and an associated rally in the smaller or more specialized companies in the sector which would be targets for further acquisitions.
In response to upward price pressure in the Insurance Sector due to the recent increase in deal-making we’ve seen short exposure decrease in both the U.S. and International markets. Over the last month, short exposure in the U.S. Insurance Sector has decreased by $846 million, or -4.9%, to $6.5 billion and short exposure in the International Insurance Sector has decreased by $1.4 billion, or -4.2%, to $32.6 billion.
Since the acquisition announcement on Monday, XL Group’s short sellers were down $135.2 million in mark-to-market losses while AXA SA short sellers were up $95.3 million in mark-to-market profits. If consolidation continues in the Insurance Sector we should see short exposure in “target” companies begin to decline as short sellers try to avoid the large mark-to-market losses incurred by XL and Validus short sellers.
The potential increase in M&A activity can be attributed to several factors: rising interest rates; U.S. tax reform; international insurers looking for more exposure to the U.S. market and cheap relative valuation as insurance companies have underperformed the S&P 500 recently. If we start seeing speculative buying of potential targets coupled with the significant acquisition premiums paid in the last two deals short sellers may be looking to trim their exposure to targets and increase exposure to potential acquirers.
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Managing Director Predictive Analytics, S3 Partners, LLC
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