Aggregate deal volume of P&C mergers and acquisitions activity increased in 2013 compared to 2012, and the average deal size doubled, according to “2014 Insurance M&A Outlook: Momentum Continues to Build,” from Deloitte, and the average deal size doubled. There also were more large deals in the P&C segment, including four transactions valued at more than $500 million, whereas there was just one in 2012.
“While the percentage of deals in excess of $500 million increased as a percentage of total 2013 announced transactions, a majority of the transactions were of the smaller, bolt-on type,” Deloitte said.
The United States accounts for 40 percent of global insurance M&A activity, Deloitte said, and global insurance M&A activity fell by 60 percent in terms of aggregate deal value in 2013. Factors contributing to the decline include: differing buyer/seller perceptions of company value, ongoing regulatory uncertainty, mediocre economic performance and some companies’ preference to reinvest excess capital into the business or to satisfy shareholders with stock buybacks and dividends, Deloitte said.
“Uncertainty about final exposure from Superstorm Sandy claims and concerns that some companies’ loss reserves are somewhat deficient likely put some business plans on hold,” Deloitte said. “Also, while rates have been improving, they are lower than what is needed to be considered a hard market.”
In 2013, the focus of M&A activity was on expanding distribution into emerging markets and acquiring smaller, bolt-on capabilities, Deloitte said. For 2014, however, Deloitte is optimistic, as M&A can be a method of promoting topline profitable growth through expansion into emerging markets or those with growth potential, diversification through niche acquisitions, and to gain new products, technologies, markets, or distribution channels.
In the life and health segment, Deloitte said there was a 40-percent decrease M&A transactions in 2013 compared with 2012 and there was a significant decrease in transaction size as well as aggregate deal volume. Most of the M&A activity was focused on annuity business, Deloitte said, which has been hurt by persistently low interest rates.
The most active segment in 2013 was brokers and agents, Deloitte said, though activity decreased compared to the year prior. “For strategic buyers, acquisitions provide avenues to new clients or additional revenue sources,” Deloitte said, and the segment continues to draw the interest of strategic and financial buyers. “Larger players, which effectively tapped out their ability to gain market share, are looking down market in the segment for M&A opportunities to increase revenues, while middle-market players are continuing to make acquisitions to drive growth.”
For 2014, Deloitte recommends insurers consider the following when developing M&A strategies:
Interest rates. Continuing low interest rates may negatively impact investment returns, which are critical to profitability, especially in life and annuities. However, they make it easier to obtain and justify debt financing for deals. Private equity has capitalized on the low interest rate environment to consolidate annuity books that have been poor performers, Deloitte said.
GDP growth. Gross domestic product is improving in the United States, Europe, Asia and Latin America, which likely will simulate demand for insurance coverage and make companies more willing to expand through M&A, Deloitte said.
Catastrophes. Hurricane activity declined in 2013; catastrophes drain capital from the industry and can put hard-hit companies in a financial bind that makes them want or need to sell, Deloitte said.
Regulation. Insurers need to remain alert for regulatory changes at the global, federal and state level. “The establishment of the FIO, increased scrutiny by state regulators, and continued uncertainty around SIFI criteria may temporarily deter some companies from engaging in substantial M&A,” Deloitte said.
Private equity. Historically, PE firms have concentrated on insurance distribution/brokerage, but interest in life and annuity companies is increasing, Deloitte said. “Those PE firms which have already run the regulatory gauntlet are likely to continue consolidating their insurance industry holdings. However, firms contemplating market entry via M&A should move promptly if they hope to compete with established players. Finally, some PE firms, especially in the broker space, are looking to cash out of investments they made a few years ago, which could stimulate additional M&A activity.”
Capital management. In general, insurers have been retaining more capital, including very liquid, low-yielding buffers, which should reassure rating agencies and investors that they are prepared for another recession. “But they also are using excess capital to invest in the business, increase dividends and/or stock buybacks, and engage in M&A,” Deloitte said.
Buyer/seller expectations. Generally, buyer/seller expectations are moving closer to alignment, and buyers and sellers are thinking more strategically about M&A. “Buyers are conducting inorganic growth analyses to determine the types of acquisitions that could make the biggest impact and put them in a position to offer higher price valuations,” Deloitte said. “Sellers are identifying where they are in the valuation cycle; if they conclude that their stock price may not increase much more it may be a good time to unload non-core assets.”
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