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Insurance M&A Spikes This Year, Fullfilling Predictions

Global insurers’ predictions for increased M&A activity throughout 2014 are proving accurate with several deals already completed.

End-of-year predictions in 2013 revealed that three-quarters of global insurers anticipated an increase in insurance M&A this year. With recent activity from Liberty Mutual and Highmark, Inc., it looks like their predictions are coming to pass.

Insurers have been anticipating the spike for some time. “I think this is somewhat late in coming about,” says Boris Lukan, Deloitte partner and head of insurance M&A practice for the U.S. The company predicted an M&A increase for 2013 that did not occur until this year. “2013 was a multi-year low in terms of insurance M&A activity … I think few would expect the kind of year that we had in 2013 to repeat again,” Lukan says.

The past year represented a major setback for M&A, according to Deloitte’s 2014 Insurance M&A Outlook. Activity fell by about 60% in 2013 due to regulatory uncertainty, mediocre economic performance, buyer and seller views of company value, and some companies’ tendency to reinvest excess funds into the business or in stock buybacks and dividends for shareholders.

[ Finding Harmony in Global Insurance Systems. ]

However, M&A momentum is picking up as insurers begin 2014, the report states. Carriers now aim to achieve topline growth by expanding into emerging markets with significant potential or pursuing niche acquisitions to gain new technologies, products, markets or distribution channels. Major issues facing companies this year include capital management, regulatory uncertainty, investment activity by private equity firms, buyer and seller expectations, and M&A capacity building by strategic buyers.

A large amount of the current and predicted M&A activity was delayed by the economic downturn of 2008. “That caused an unnatural slowness in M&A activity in most parts of the world,” explains Jack Gibson, managing director of global mergers and acquisitions for Towers Watson. From 2009 through 2011, insurers huddled in the shadows, afraid to make any eye-catching moves.

Now, the industry is regaining confidence and exploring new opportunities. “Of the deals that have occurred, a number have received very positive reactions from buyers and sellers,” Gibson says. “Companies making bold moves are getting recognized for their abilities.”

It will take time for the industry to reach equilibrium, he explains, as insurance is primarily composed of followers. Many businesses are keeping watch on current activity and, seeing success, are being emboldened to make changes that should have happened two to three years ago. Gibson predicts that activity will continue to increase over the next one to three years.

Many recent deals are driven by companies seeking growth to demonstrate ROE to investors. Because organic development is difficult to pursue in a slow insurance market like that of the United States, businesses are turning to inorganic growth opportunities.

Technology is another major driver of current M&A activity, explains Gibson. “Some companies, especially in P&C, are very focused on taking advantage of technology in terms of usage-based insurance and making use of big data in the marketplace,” he says.

Businesses see an advantage in using technology to improve underwriting efficiency, expand the scale of administrative systems, and capitalize on capabilities that help them pursue acquisitions with greater cost efficiency, he says. Those that feel that they have an edge are more likely to initiate deals because of decreased costs. For example, insurers with superior administrative systems can efficiently transition new businesses into their existing framework.

Kelly Sheridan is Associate Editor at Dark Reading. She started her career in business tech journalism at Insurance & Technology and most recently reported for InformationWeek, where she covered Microsoft and business IT. Sheridan earned her BA at Villanova University. View Full Bio

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User Rank: Author
3/1/2014 | 2:02:45 AM
re: Insurance M&A Spikes This Year, Fullfilling Predictions
It's interesting to see these analysts point specifically to technology as a factor in many of these deals -- the fact that some of the deals are driven by a desire to acquire the tech capabilities of the target company is very telling. Not only is it an M&A driver, but it indicates how difficult it can be to transform IT infrastructure or to develop new, leading-edge capabilities. It takes time that most companies don't have in today's competitive environment (that's also a driver of the interest in cloud and hosted solutions). Basically what Allstate did when it acquired Esurance a few years ago. Ultimately, tho, I think what is most significant about the M&A trend is how many of these deals will work -- not just that the deal goes through, but that a few years down the line the merged company is stronger, more profitable and more competitive than the 2 firms were pre-deal. Good analysis, Kelly.
User Rank: Author
2/28/2014 | 7:05:21 PM
re: Insurance M&A Spikes This Year, Fullfilling Predictions
Thanks, Nate. It was interesting to speak with so many experts and gain their insights on all this activity. Now, I don't doubt that we'll see more of it as insurers pursue new growth opportunities.
Nathan Golia
Nathan Golia,
User Rank: Author
2/28/2014 | 4:53:55 PM
re: Insurance M&A Spikes This Year, Fullfilling Predictions
Great overview, Kelly. It's rare that we see prediction articles that we write in December pay off in January, but this trend shows no signs of slowing down. Insurers of all sizes have told me this year that they are looking to acquisition as a means of growth both globally and domestically. Big fish eat the little ones, and so on down the line...
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