Mergers and acquisitions activity among global insurers is on the increase, according to a survey of senior insurance executives by Towers Watson, a professional services company, and Mergermarket, a global intelligence provider.

“There should be cautious optimism surrounding the insurance sector and related M&A across North America,” said Jack Gibson, Towers Watson’s global lead for insurance M&A. “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.”

In the life sector, insurance executives said general economies of scale were the most important driver of deals. Among P&C insurers, composite and reinsurance firms, the desire to grow through expansion into new territories and business segments was most important driver of deals, Towers Watson said.

 “In the U.S., on the life side, there have been a number of transformational deals that have occurred in the recent past,” Gibson said. “Several U.S. life insurers have expanded their positions in important product lines on acquisitions they’ve made. Other insurers have exited or entered the U.S. as a way to alter their geographic diversification.”

More than 250 executives from life, property & casualty (P&C) and composite insurers participated in the survey, and 73 percent said their companies were planning M&A transactions over the next three years, compared to 44 percent who have completed such transactions in the three past years; 77 percent said they anticipate an increase in M&A activity over the next three years.

Towers Watson said the value of global insurance M&A deals in 2012 was the second highest in the past eight years, and the value of deals completed in the first half of 2013 was 44 percent higher than the same period last year.

According to the report, however, valuation gaps continue to present a significant challenge to the market. Those acquiring companies are seeking a global average of about 15 percent return on capital, Towers Watson said. Valuations could be pressured further, as a fifth of respondents said they plan to divest operations in the next three years, compared to 34 percent who 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,” Gibson said.

See also: Allianz CEO Says New Regulation to Create Room for Acquisitions

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