The data shows that global deal value across all sectors increased by 8.4% in H1 2017 while volume sunk by 12.3%. This trend is being replicated in the insurance sector, with deal volume falling by 17.7% from H1 2016, while value has increased by 170% over the same period. The majority of respondents (78%) expect to undertake one to two purchases in the next three years, compared with 90% that made one or two acquisitions in the past three years.
This move towards larger and megadeals can be seen in the split of deal sizes. In 2016, there were only 14 deals worth more than US$500m. In the first half of 2017, there have already been 11. This trend corresponds with the survey findings, which show that 17% of firms expect at least one of their acquisitions over the next three years to be a major deal compared with 8% that have made one such acquisition over the previous three years.
Firms that have been most acquisitive in the past anticipate the most future buy-side activity. Of those firms that have made between one and two deals in the past three years, 81% expect to make the same number of purchases in the next three years. Of those that made between three and four deals in the past three years, 44% expect to make three or more deals in the next three.
“This seems to signal that activity will continue to be driven by serial acquirers and those that have been active in recent years, as opposed to new entrants that have sat out the past few years finally sticking their toe in the water,” said Fergal O’Shea, EMEA Life Insurance M&A Leader at Willis Towers Watson. “A number of companies have made large acquisitions in the past two years and have been in integration mode. Once that completes, they can turn from being internally focused back to M&A.”
The survey shows the most powerful motivation for undertaking an acquisition over the next three years will be to gain a strong brand. This reflects the impact that technology and the internet in particular have had on the industry, with the web being the primary distribution network for companies.
The transition to digital sales requires a strong, recognisable brand. According to Willis Towers Watson, this can be just as important as competitive pricing, reinventing the company through a major acquisition and rebranding to reintroduce the company to consumers. Lower rates of insurance among millennials also mean that insurers must work harder than ever to win business and this increases the value of effective branding.
“M&A in the insurance industry will be driven by the need to create synergies, build brands and tackle technological advances,” said O’Shea. “However, as our survey shows, companies will be searching for quality over quantity.”
While only 17% of respondents say M&A has produced 3% or more annual growth in earnings per share over the previous three years – dealmakers are more optimistic about the future. More than half (52%) of firms expect that M&A will help to drive this rate of growth over the next three years. Just under two-thirds (63%) say they anticipate M&A will result in earnings growth of between 2% and 3% in future.
“For the last few years, companies have been trying to understand the new regulatory regime,” commented O’Shea. “Now there seems to be increasing focus on understanding the best deployment of capital to optimise their returns in light of those requirements.”
According to survey respondents, just over half of firms now have a capital optimisation strategy in place, which still leaves more than two out of five firms without such a strategy to determine where their capital would be best deployed. As focus increasingly turns to strategic considerations and growth, analysis by Willis Towers Watson indicates insurers would benefit from dedicating resources to capital optimisation and understanding the most efficient use of capital to both protect and create value.
“Caught between the ongoing pressures of tepid growth in premiums, low interest rates and the burden of regulatory requirements, insurers must ensure they are making the most efficient possible use of their capital,” said O’Shea. “Those who pay the closest attention to their strategic aims, and how managing their capital and pursuing M&A can underpin those goals, will have the best chance of success.”
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