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Insurance bosses expect M&A to gather pace

Close to four out of five North American insurance executives say their companies are actively considering potential acquisitions, according to a survey which indicates a likelihood of growing consolidation in the industry.

The survey was carried out by global professional services firm Towers Watson, which found that 86 percent of insurance executives expected to see an increase in mergers and acquisitions (M&A) activity in the next three years, compared to the previous three, while 78 percent were actively considering acquisitions.

“Insurance M&A activity slackened to an unnaturally low level in most parts of the world after the 2008 financial crisis,” said Jack Gibson, Towers Watson's global lead for insurance M&A. “But lately we've seen a strong trend toward accelerated activity that has featured bold, transformative moves into new geographies, product lines and distribution systems.

“Many of these recent deals have been well received by both buyers and sellers, bringing significant value, attractive platforms and superior talent to the marketplace.”

Among the big deals in the Bermuda market this year was the announcement that life reinsurer Wilton Re struck a $1.8b deal to be sold to the Canadian Pension Board of Management, as reported in The Royal Gazette on Monday. And on Tuesday we reported that Bermuda-based Catalina Holdings had agreed to acquire Sparta Insurance Holdings.

In January, Tower Group International Ltd, after going through a rough year in 2013 when its stock price fell by about 78 percent, merged with fellow Bermuda company ACP Re Ltd.

And in December last year, Canopius was taken over by Sompo Japan Insurance, part of NKSJ Holdings, a top three insurer in Japan in a $600 million deal.

The survey found that insurers that are considering acquisitions cited several different areas of focus, with roughly two-thirds (64 percent) seeking an opportunistic purchase (one where “the right deal comes along”) and more than half (55 percent) interested in bolt-on acquisitions within an existing geography and segment.

Nearly half (47 percent) said they would focus on expansions into new markets, with the same percentage (47 percent) indicating they would pursue acquisitions to improve access to new customer segments, distribution capabilities, product expertise, or other technical or operational capabilities.

“Each insurer has its own philosophy about acquisitions, but there are a few parameters all acquirers should observe,” said Mr Gibson. “Foremost, insurers need a clear M&A strategy developed in advance that aligns with their broader corporate strategy. Those that do are most likely to find a strategic fit that makes sense from both a near- and longer-term perspective.

“Beyond financial considerations, it is vital for insurers to carefully consider integration and cultural issues in advance, not after the deal is announced, as some deals that are strategically and financially attractive may not be good organisational fits. It is also important that insurers continually evaluate assumptions during the due diligence period to confirm the transaction still makes as much sense at the time the offer is made as it did earlier in the process.”

Insurers believe the most significant drivers of further activity over the next three years will be strategic intention to expand into new geographies/sectors (58 percent), difficulties of organic growth given the challenging economic times (57 percent) and general economies of scale (54 percent). Conversely, insurers cited the price expectation gap between buyers and sellers (55 percent) and limited availability of viable opportunities (52 percent) as the major impediments to activity.

The survey also evaluated the relative attractiveness of geographical regions in which North American insurers would be most willing to pursue acquisitions, insurers' plans to raise capital and how the regulatory environment has impacted M&A activity. When asked to rank the most attractive regions to do business, insurers chose North America (87 percent), Asia Pacific (70 percent) and Latin America (67 percent).

The majority of insurers plan to initiate steps to undertake a variety of capital-linked activities over the next three years, such as debt issuance (68 percent) and other capital-raising exercises (50 percent).

Only 22 percent said regulatory environment-related concerns have impacted their M&A activity during the last three years.

Canopius: Acquired by a Japanese insurer in December

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Published March 27, 2014 at 9:00 am (Updated March 26, 2014 at 9:00 pm)

Insurance bosses expect M&A to gather pace

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