Global insurers are regaining their appetite for mergers and acquisitions, according to a survey of senior insurance M&A executives conducted by Towers Watson in conjunction with Mergermarket.
Nearly three-quarters (73%) of the over 250 executives interviewed from life, property & casualty(P&C) and composite insurers around the world said that their companies were planning M&A transactions over the next three years. This compares to 44% who said their companies completed a transaction in the last three years. Similarly, more than three-quarters (77%) said they foresee an increase in insurance M&A in the next one to three years.
This outlook is borne out by recent trends, which have already seen an uptick in insurance M&A activity. The value of global insurance M&A deals in 2012 was the second highest seen in the last eight years. In the first half of 2013, the value of deals completed was 44% higher than during the same period last year.
“In the US, on the life side, there have been a number of transformational deals that have occurred in the recent past,” said Jack Gibson, Towers Watson’s global lead for Insurance M&A. “Several US life insurers have expanded their positions in important product lines on acquisitions they’ve made. Other insurers have exited or entered the US as a way to alter their geographic diversification.”
However, valuation gaps remain a significant challenge to the market, notes the report. Acquirers are seeking a global average of about 15% return on capital, ranging from approximately 14% for deals in Western Europe and the Americas, to roughly 17% in Africa and the Middle East.
Further pressure on valuations may come from the fact that only a fifth of respondents said they are planning to divest operations in the next three years, compared to 34% that have completed one or more divestments in the past three years.
“If you combine fewer plans for companies to divest with an increased appetite for acquisitions, we could see the possible reemergence of a seller’s market driving competition for assets, which would reduce target returns and raise valuations,” said Gibson.
Many companies display a regional “home bias” for where they are likely to target their M&A activity, but there is universal agreement that the Asia Pacific region provides the most attractive opportunities over the next three years, while North America rated second least attractive. Despite the fact that Western Europe was rated at the bottom of the regional attractiveness league, 55% of respondents said that Solvency II would promote acquisitions due to reasons such as restructuring and capturing diversification benefits.
“There should be cautious optimism surrounding the insurance sector and related M&A across North America. Deal making is being driven by consolidation as a response to depressed premiums and more stringent capital requirements. This is pushing firms to expand into new product areas to diversify risk and maximize return on capital,” said Gibson.
The principal drivers for M&A activity vary among the types of insurer. In the life sector, respondents rated general economies of scale as the most important influence on deals, whereas among P&C, composite and reinsurance firms, the need to find growth by expanding into new territories and business segments was paramount.
Researchers from Mergermarket canvassed the opinions of 255 senior insurance executives from life, P&C and composite insurers as well as reinsurers regarding their outlook for global M&A in the insurance sector, with an emphasis in EMEA. The criteria for inclusion in the survey were that respondents worked for an EMEA-domiciled insurance company, or where non-EMEA domiciled, the business had operations in EMEA or were otherwise active in the region. Interviews were carried out in the second and third quarters of 2013.
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