International insurance mergers and acquisitions appear to be on the increase, according to “Surviving the perfect storm: The outlook for insurance M&A in EMEA,” a report from Towers Watson.
Seven out of 10 global insurance executives interviewed by the global professional services company and global intelligence company Mergermarket, said their companies were planning mergers and acquisitions over the next three years. Over the past three years, 39 percent have completed such a transaction and 77 percent said they anticipate an increase in insurance M&A in the next one-to-three years.
Towers Watson and Mergermarket interviewed 250 global insurance executives for the survey.
The value of global insurance M&A deals in 2012 was the second-highest seen in the last eight years, Towers Watson said, and for the first half of this year, the value of deals completed was 44 percent higher than for the same period last year. Valuation gaps remain a significant challenge to the market, however, Towers Watson said. Those acquiring are seeking a global average of 15.2 percent return on capital, ranging from 13.8 percent for deals in Western Europe and as much as 17.2 percent in Africa and the Middle East.
“These rates may be an obstacle to deals as only a limited number of targets will likely generate such high returns,” said Fergal O’Shea, EMEA life insurance M&A leader at Towers Watson. “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.”
Valuations have been pressured, Towers Watson said, as only a fifth of respondents said they are planning to divest operations in the next three years, compared to 34 percent who 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,” said Andy Staudt, EMEA P&C insurance M&A leader at Towers Watson.
In the first half of this year, EMEA accounted for 53 percent of deals completed, and a growing proportion were for assets in Central and Eastern Europe. Fewer than half, 47 percent said they expect non-European companies will play a major role in EMEA-based insurance M&A and 45 percent said private equity firms are driving the deal-making, Towers Watson said.
Towers Watson said there is “universal agreement” that the Asia Pacific region offers the most attractive opportunities over the next three years; Western Europe was rated the least attractive region, as 55 percent of participants said Solvency II would promote acquisitions due to 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,” said Paul Francis-Grey, Assistant Editor and Head of Financial Sector Coverage at Mergermarket. “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.”
M&A drivers vary by sector. For life insurers, economies of scale had the most influence on deals; among P&C, composite and reinsurance firms, the need for growth by expanding into new territories and business segments was paramount, Towers Watson said.
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