New York and London — Insurance equity analysts expect a significant increase in property/casualty mergers and acquisitions (M&A) this year, and life insurers who expand into emerging markets over the next three years are likely to be rewarded with superior ratings, according to findings of a global survey by Bermuda-based
Conducted by New York-based Institutional Investor Market Research Group as part of Accenture’s High Performance Business research, the survey queried more than 100 P&C and life insurance equity analysts, and covered a range of topics, including profit and growth strategies, capital utilization priorities, critical industry challenges, operational excellence and industry top performers.
More than three-quarters (77%) of analysts rate operational efficiency improvement—or “transformation”—programs as the most valuable use of capital after share-buybacks and dividend increases (cited by 83% of respondents).
“One of the most remarkable findings of our research is that such a vast majority of analysts hold such bullish views on longer-term transformation programs, and see an opportunity for insurers to outperform the market through increased efficiency,” says Serge Callet, managing director of Accenture’s Insurance practice. “Our recent analysis suggests that when it comes to return on equity, transformation programs can have an equal or greater positive effect than share buybacks can.”
Further highlighting the analysts’ focus on efficiency, “aging systems and IT modernization” is the second-most widely cited industry challenge among both P&C and life analyst respondents.
The vast majority (85%) of life insurance analysts say expansion initiatives by North American, European and Japanese insurers into Brazil, Russia, India, China, Mexico or South Korea will be a key driver of superior ratings over the next three years. Life analysts are more likely to identify organic growth as a high priority (cited by 82%) than to cite M&A (48%) as preferred means of expansion into such emerging markets.
More than two-thirds (71%) of P&C analysts surveyed say they anticipate a “significant increase” in M&A activity in 2008. At the same time, the findings indicate significant differences by geography, with P&C analysts in North America three times as likely as those in Europe to predict a significant increase in M&A activity.
Some insurers making M&A moves over the past few months include The Hartford, American Financial and AEGON.
“The logic of consolidation within the property/casualty industry, particularly in North America, may be gaining favor as the economy slows and as rates soften,” says John Del Santo, managing director of Accenture’s Insurance practice in North America. “However, our research suggests that analysts might not fully value these transactions without a clear linkage to organic growth or until efficiencies are realized.”
P&C analysts globally attached modest importance to M&A in terms of earning superior ratings, but they widely favored organic growth:
• 45% rank M&A among the most valuable uses of capital.
• 67% say M&A within mature markets is import nt or critical to earning superior ratings over the next three years, compared with 84% who say the same of organic growth.
• 33% describe M&A within mature markets as “unimportant” to earning superior ratings over the next three years, compared with 16% who say the same of organic growth.
“M&A winners will focus on rigorous deal discipline and early post-merger integration planning in order to quickly realize synergies and demonstrate a path to profits,” DelSanto says.
Nine out of 10 (89%) P&C analysts cite climate change and environmental issues among the industry’s top three challenges. The third is aging systems and IT modernization (85%), followed by new regulations and reforms (76%), cross-border competition (69%), terrorism and geopolitical instability (61%), growing risk to investment portfolios (59%), changing customer demographics (58%), workforce demographic changes (52%), and competition from banks (35%) and capital market firms (27%).
Other findings include:
• The majority (57%) of analysts say IT investment in areas such as policy administration, claims management, process optimization and call centers are “critical” to the insurance industry over the next three years, with another 34% of analysts who describe such IT investment as “important.”
• 82% of analysts say the insurance analyst community would benefit from more education on new technologies and their role in business performance.
Sources: Accenture and INN archives
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