International insurers are regaining their appetite for mergers and acquisitions (M&A), according to a survey of senior insurance M&A executives conducted by Towers Watson, in conjunction with Mergermarket.
Seven out of 10 of the over 250 executives interviewed from life, P&C and composite insurers around the world said that their companies were planning a M&A transaction over the next three years. This compares to 39% who have completed a transaction over the last three years. Similarly, 77% of respondents 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% up on the same period last year.
However, valuation gaps remain a significant challenge to the market, notes the report. Acquirers are seeking a global average of 15.2% return on capital, ranging from 13.8% for deals in Western Europe up to 17.2% in Africa and the Middle East.
Fergal O’Shea, EMEA Life Insurance M&A Leader at Towers Watson, said: “These rates may be an obstacle to deals as only a limited number of targets will likely generate such high returns. Especially when looking at consolidation in developed markets, returns of this level generally require large expense savings or other synergies to be delivered – which carry risk in themselves.”
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 in the past three years.
“If you combine that with the increased appetite for acquisitions, the possibility of a re-emergence of a seller’s market is likely to result in competition for assets and elevated valuations,” commented Andy Staudt, EMEA P&C Insurance M&A Leader at Towers Watson.
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. Despite the fact that Western Europe was rated 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 Europe, with a number of telling factors set to influence a larger volume of deals,” commented Paul Francis-Grey, Assistant Editor and Head of Financial Sector Coverage at Mergermarket.
He continued that: “The recent flow of IPOs within the insurance space, especially in the UK market, shows there is a healthy appetite among investors looking for value among companies in the sector. Recent examples include Direct Line and Assurance Partnerships.”
The principal drivers for M&A activity vary between 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.
|