Insurance M&A faces 'quiet revolution': PwC

However, transaction volumes are not likely to recover along the same lines as in the last decade

A new report from PwC has revealed the recovery in merger and acquisition (M&A) in the insurance sector. However the report says that transaction volumes are not likely to recover along the same lines, as in the last decade. Instead, the next few years will see a quiet revolution in global insurance M&A. 

 

James Tye, transaction services partner at PwC, said, “As insurers adapt their business models to this new environment, the strategic importance of M&A will only increase. However we do not expect transaction volumes to recover to their pre-crisis levels. Instead, we predict the next few years will see a quiet revolution in global insurance M&A.”

 

In the short to medium term, low profitability will have a critical effect on insurance M&A. Weak profitability is closely linked to low investment yields, and is encouraging insurers in mature markets to seek domestic deals and to plan international expansion. Technology will continue to grow in influence in insurance deals; political risks, the economic climate and regulatory reform will all continue to shape the market; and Asian and Latin American targets top the wish lists for insurers with capital to spend, the report says.

 

Nick Page, transaction services partner at PwC, said, “The global insurance industry’s outlook is improving. The mature economies of Europe and North America are moving towards recovery, while the emerging markets of Asia and Latin America continue to grow. A pick-up in global premiums is forecast, but the industry should not expect a return to the old ways. Insurers are operating in a world where the goal of long-term growth seems to be getting further away. Instead insurers face a range of obstacles including persistently low investment yields, tightening regulation and overcapacity in many markets."

 

Technology will play an increasingly important role in insurance deal-making. Insurers will acquire technological expertise, for example, in telematics, in part as a defensive strategy against disruptive new entrants. Communication or social networking companies could also use M&A to acquire an insurance vehicle and combine it with their high levels of customer insight and trust. 

 

Political risks for insurance M&A include

• The sale or break up of nationalised insurers
• Intervention in systemically important insurers
• Restrictions on the sale of insurance assets or greater protectionism

 

Economic concerns include the shift of power away from developed economies, the threat of renewed uncertainty in Europe and the chance of market volatility creating deal opportunities. Regulatory trends include gradual harmonisation – seen in the IAIS’ anticipated adoption of Solvency II – but also disruption, illustrated by changes to Solvency II or the identification of global systemically important insurers.

 

General insurers that have already achieved economies of scale are increasingly turning to smarter pricing to improve their profitability. European insurers could slice two to three% off their combined ratios by emulating pricing best practice from markets such as the USA or Australia. Over the next few years the ability to price individuals rather than groups of customers will become an increasingly important driver of M&A.

 

Premium growth in general insurance in developed markets is slowly recovering from 2010’s low, but remains restricted by slow economic growth. Aggressive competition, higher claims and weak investment yields are putting profitability under pressure. Growth is much stronger in developing regions, but even here, many insurers’ combined ratios are climbing. The search for greater scale remains a crucial strategic response to these challenges, and the drive for domestic consolidation will continue to shape global insurance M&A. 

 

Insurers with capital to spare will continue to target Asia and Latin America and general insurers that can afford to do so will continue use M&A to acquire new customers. Better capitalised firms in Europe and North America will continue to follow established routes into emerging markets in Asia-Pacific or Latin America. In some cases, they will take advantage of their peers’ withdrawals from the same markets, says the report. 

 

Life insurance premiums in many mature markets are expected to return to modest growth from 2013, but low yields are squeezing profitability.     Capital is also under pressure from progressively tougher solvency requirements. But, the picture in emerging markets is much more positive. Premium growth remains strong, and should improve further in Asia-Pacific following a period of regulatory upheaval in China and India.

 

Global insurance M&A will continue to generate a steady flow of midmarket transactions, punctuated by the occasional large-cap deal. Over time, M&A will see insurers sort themselves into three groups: Large international insurers with deep technical and financial resources; local and regional firms with distribution-led strategies; and niche players specialising in particular products or customers.

 

Despite the comparatively rapid growth of Asia-Pacific general insurance, the dominance of motor means that profitability pressures are growing in a number of markets. As a result, scale will become an increasingly important driver of M&A, helping firms to generate cost synergies and invest in underwriting. Disposals by international groups will continue to give local and regional general insurers the chance to build scale, says the report.

 

Regional growth opportunities will also become more sought after. General insurers facing slow growth in their home markets will also become increasingly alert to less mature markets closer to home. In Asia, Japanese insurers – already active as international bidders – will be joined by others seeking intra-regional expansion. This process will be helped by the proximity of mature territories like Singapore and Hong Kong to faster growing markets such as Malaysia and China. As international firms develop regional networks, physical and cultural proximity could help to deliver lower costs as well as higher growth. In the medium term, emerging regions such as Asia-Pacific offer much less scope for closed book consolidation than Europe. Run-off businesses in these markets are much smaller and insurers are typically more profitable and better capitalised. Even so, the potential for run-off deals in comparatively mature markets such as Korea will only increase in the longer term.

 

M&A in Asia-Pacific will be increasingly shaped by regional insurers. The retreat from Asia-Pacific by some international groups will continue to generate opportunities for M&A. The gradual introduction of more stringent regulation, especially in South-East Asian markets such as Indonesia, Thailand and Vietnam will further stimulate deals. Bidders will include a handful of well-capitalised global insurers, but local groups will be increasingly active. The next major Asian life insurers are likely to emerge from within the region. There is no lack of capital in the sector, and the importance of branding and reputation suggest that regional groups will use M&A to build on established distribution platforms. 

 

The gradual ageing of Asian populations – a major theme in Japan, and an emerging one in Korea and China – will also drive transactions. Life insurers from developed markets will use M&A to leverage their sophisticated product expertise across the region. Asia-Pacific firms may also make acquisitions in developed markets to increase their capabilities in long-term savings or pension products.

 

In the medium term, emerging regions such as Asia-Pacific offer much less scope for closed book consolidation than Europe. Run-off businesses in these markets are much smaller and insurers are typically more profitable and better capitalised. Even so, the potential for run-off deals in comparatively mature markets such as Korea and Chile will only increase in the longer term.