A slowly recovering economy and a lingering soft market for insurers may portend an increased pace of consolidation in the insurance industry, a new report finds.
The report, “Insurance M&A: Overcoming the Challenges and Leveraging the Lessons Learned From the Financial Crisis,” was authored by Howard Mills, director & chief advisor of the Insurance Industry Group at New York-based Deloitte LLP, and by David Simmons, director and insurance M&A leader, Deloitte Tax LLP. The authors contend that after a prolonged lull in wake of the credit crisis, the environment is now favorable for mergers and acquisitions.
“Equity markets are rising, interest rates are low, and there are a growing number of companies with significant cash positions,” the report states. “Meanwhile, insurance companies are looking for ways to grow premium in the current soft market and there is ample room for consolidation — all favorable signs for an upturn.”
Yet, the report says one difference moving forward is that acquirers will place an even greater emphasis on risk management during the evaluation stage of a merger or takeover. The authors suggest that insurers focus on risk during the due diligence process and extrapolate how the newly acquired entity will alter the acquiring organization’s risk profile. “A focus on understanding the risk profile of the acquired subsidiaries and integrating them into the corporate culture is critical in driving and sustaining value from the acquisition.”
Despite this new appreciation of M&A-related risk, the authors state the lure of acquisitive growth will be hard for insurers to resist. “As we see signs of recovery unfold in the marketplace, it is likely that insurers will leverage the increasing favorable conditions to improve deal-making and integration activities — all of which can lead to premium growth and strong competitive advantage onward.”
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