Insurance industry M&A sees decline in volume counterbalanced by mega-deals

M&A activity in the insurance industry has slowed, although large deals aimed at consolidation have sprung up, boosting relative value. While branding-needs drove activity, regulatory matters and geopolitical concerns were cited as key barriers by just under half of executives in the sector.

M&A activity has picked up in recent years, on the back of, among others, low-cost money, a need to strategically access new technologies, and market expansion. The insurance industry has also been active in the space,  as total deals topped €170 billion last year.

New analysis from Willis Towers Watson, in a newly released report ‘Hitting the Right Targets’, explores current trends in the insurance M&A segment, from recent deal history to what is impacting current and future M&A in the segment. The study involved responses from 200 senior-level executives in the insurance industry.

The latest figures put deal value at around €20 billion, a sharp increase on the same period in H1 2016, but down somewhat on H2 2016, when total value stood at close to €40 billion. Deal volume, meanwhile, was down from the same period last year, at 88 vs. 107. This echoes a global trend, which has seen value generally increased and the amount of activity decreased, suggesting that investors are keener on quality than quantity of deals in 2017.The research shows that deal activity has been hit, in part, by global geopolitical uncertainty, with consolidation being a key driving force behind recent deals, although keen attention has been paid to reduce anti-competition business practices. So far, there have been 11 deals valued at more than €500 million this year, compared to 14 such deals in all of 2016.

The research also continues to point to a relatively small group of serial acquirers, according to Fergal O’Shea, EMEA Life Insurance M&A Leader at Willis Towers Watson. He adds “A number of companies have made large acquisitions in the past two years and have been in integration mode. Once that completes, they can turn from being internally focused back to M&A.”

In terms of the key aspects of respondents’ wider M&A target focus, a number of responses were garnered, both in terms of broad importance and the most important metrics. On the level of broad importance, return on capital was cited as a metric by 83% of respondents, followed by payback period / IRR, by 68% of respondents. 67%, meanwhile, cited top-line revenue growth.

The single most important metric cited, varied somewhat between the firms surveyed. 22% cited top-line revenue growth, while 21% cited return on capital. Solvency II-based came in at 16% of respondents, while 11% said rating agency criteria.

Synergies have been the most highly cited reason to acquire a company for the past three years. However, the most recent survey suggests that, for the coming three years, ‘gaining a strong brand’ is increasingly important – as indicated by 68% of respondents. Other areas that are also indicated as drivers for acquisitions in the coming three years include access to innovation, technology and / or IP, at 59% of respondents; to better meet regulatory capital requirements, at 65% of respondents; and use of surplus capital, with many firms sitting on considerable dry powder.

Again, technology investment is subject to the same trends as M&A more generally. FinTech investment remained steady over the past year – and while volume dropped off, value persistently increased.

Access to talent is an increasing priority, as labour markets tighten, while diversifying insurance product offerings has decreased in relative importance. Remarking on the trends, O’Shea said, “M&A in the insurance industry will be driven by the need to create synergies, build brands and tackle technological advances. However, as our survey shows, companies will be searching for quality over quantity.”

In terms of expected barriers in deal-making activity expected for the coming years, regulatory matters – particularly for capital requirements – comes in at the number one spot at 45% of all respondents, followed by ‘securing board approval’ at 41% of respondents. Political uncertainties were cited by 35% of respondents, as Brexit and the US Presidency continue to draw international and regional attention.

Low quality targets (20%), shareholder approval (16%), ownership restrictions (16%), insufficient number of buyers capable of executing a deal (9%) and available finance (5%), round off the major reasons cited by respondents.

“For the last few years, companies have been trying to understand the new regulatory regime,” commented O’Shea. “Now there seems to be increasing focus on understanding the best deployment of capital to optimise their returns in light of those requirements.”