Continued acceleration of activity in insurance M&A market expected: Deloitte

A number of indicators support continued acceleration of activity in the insurance mergers and acquisitions (M&A) market, notes a new report from Deloitte.

In 2013 and 2014, “an increased number of large M&A announcements helped to drive the aggregate deal value for the year, offsetting a decline in smaller details,” notes the report, 2015 Insurance M&A Outlook: Continuing acceleration. “There is clear evidence to suggest that momentum will continue to build in 2015, with activity gaining traction as the year progress,” states the report. That said, challenges remain, such as the current state of Europe’s economy, the fact that numerous regions are experiencing geopolitical turmoil, and that the regulatory landscape for insurance is likely to remain in flux.

Deloitte reports that 2014 insurance M&A activity increased significantly by most measures in all segments for 2013. A chart in the report shows there were 315 deals in 2013 and 399 in 2014, a 27% increase, with the aggregate deal value up 136% to $21.7 billion.

The activity in 2014 was highlighted by several new dynamics in the M&A market, including the emergence of the large, transformative deal, the emergence of the foreign buyer, and the emergence of meaningful consolidation activity in the reinsurance sub-sector.

Looking specifically at property and casualty deals, there were 13 deals in 2013 and 12 in 2014, with a 49% increase in aggregate deal value to $7.0 billion. “Examining the data for transaction with published announced deal value, there were five transactions in 2014 that were in excess of $500 million compared to four such transactions disclosed in 2013.”

Related: Desjardins-State Farm deal officially closes

In the p&c market, buyers have been seeking scale, diversification and/or market access. “Where p&c insurers have found themselves dealing with increased competition for a limited number of acquisition targets, companies with more capital are becoming more aggressive. Some have diversified from balance sheet risk to do bolt-on transactions with fee-driven businesses to counter the effects that aggressive underwriting conditions have had on their ratios.”

Related: 2014 an ‘extremely active period’ for insurance agency M&A in Canada, U.S.

The report cites a number of indicators supporting a positive forward-looking view strengthening macroeconomic conditions in 2015, including the following:

• the possibility of a rising interest rate;

• continued organic growth challenges;

• historic levels of excess capital;

• pressure to put the capital to work as stock buybacks become a less-favoured capital management vehicle;

• structural factors and competitive dynamics driving the consolidation of the reinsurance sub-sector;

• increased interest in insurance M&A from strategic, private equity and foreign buyers; and

• several large, late-2014 transactions that may stimulate conversations about M&A among company board and C-suite executives.

The report notes that “as high capital reserve levels, intense price competition and stagnant organic growth continue to depress insurance company ROE (return on equity), strategic buyers are expected to turn to M&A to build out capabilities and markets.”

Related: Western Financial acquires full ownership of Falkins brokerage in southeastern B.C.

Still, Deloitte advises that buyers are expected to be prudent and selective in their acquisitions. “Today’s is a more cautious M&A environment than it was seven or eight years ago, when there were always a few companies that had cash reserves and when the right opportunity at the right price came along, they would buy it,” the report notes. “The key to long-term sustainability and fundamental success in a more risk-aware M&A environment is being able to walk away from a deal unless it ticks all the boxes.”

The report notes that the link between business strategy and M&A strategy will become increasingly important and visible in 2015. Strategic buyers looking for the right partner should do the following:

• refresh corporate strategy;

• conduct an inorganic growth analysis;

• build or refine the ability to transact; and

• build or refine the ability to integrate.