Momentum building for more insurance M&A activity in 2014: Deloitte

Despite a lower number of merger and acquisition deals in the insurance industry last year, and several economic and regulatory challenges, industry observers are “cautiously optimistic about 2014,” notes a new report from Deloitte.

In its 2014 Insurance M&A Outlook report, the firms suggests that this year could see momentum building around mergers and acquisitions.

The number of deals made on a global basis among U.S. and Bermuda companies declined last year to 63, from 109 in 2012 and 110 in 2011, according to the report. Last year also saw a “significant decline in the reported aggregate deal value resulting from a decrease in average deal value.”

The United States accounts for more than 40% on average of global insurance M&A activity (based on aggregate deal value), according to Deloitte.

However, its activity fell by about 60% last year, Deloitte says. Interest rates and “mediocre economic performance,” regulatory uncertainty at all levels and private equity investments all presented challenges for insurers in 2013 in terms of M&A activity.

M&A activity last year overall for the industry was mainly focused on expansion into emerging markets and acquiring smaller capabilities, not major transformative deals, the report also notes.

For property and casualty, however, the aggregate deal volume of transactions increased in 2013 over the previous year. In 2012, there was one transaction above $500 million, while last year, there were four, according to Deloitte’s analysis.

Overall, fewer organic growth opportunities might spark more M&A activity in 2014, Deloitte says. Some of that activity will include moving into emerging markets, although the middle market is likely to see more transactions domestically, according to the report.

Going forward with M&A strategy this year, insurers will have to focus on economic and market activity, as well as changes in the regulatory environment, Deloitte says. Insurance companies must also pay attention to private equity firm involvement in the industry in terms of M&A and their own capital management requirements.

“Entering 2014, momentum continues to build for increased insurance company M&A,” the report says, noting that as the global economy is improving, and many insurers are well-capitalized and looking for news ways to make that capital work for them.

“While 2014 may not see a significant increase in the volume of insurance M&A activity or any transformative deals, traditional companies may decide to expand their footprint by acquiring niche businesses, such as P&C insurers buying underwriting desks and letting the book of business follow the underwriters,” the report adds.