Merger and acquisition activity in the insurance industry is on the rise, according to New York-based analyst firms Towers Watson and Deloitte, which each presented research to that effect this week.
Jack Gibson, Towers Watson’s managing director, global mergers and acquisitions, suggests that with economic growth in mature economies still stagnant, carriers are looking to M&A to diversify their distribution strategies in those countries, or to take advantage of higher demand in emerging markets. At the same time, some companies are looking to divest themselves of certain lines of business. This makes it easier for buyers to find sellers.
"I think that [increased activity] is around both improved capital and increased earnings," he says. "People are looking outside their normal areas — for greater global expansion, or new channels — while other companies are definitely looking to better balance their portfolio or right-size things. "
Insurers that are looking to make acquisitions aren't doing so lightly, Gibson adds. Due diligence is the name of the game as companies search for targets that are both functional and cultural fits for their long-term strategies.
"It's not, 'Lets just look at any small company regardless of price.' There are situations where companies have very similar businesses and they feel they can integrate the target in a much more efficient way than the competitors," he explains. "Or, it could be that somebody's looking to enter a new product line and they want a new foothold in there."
The idea of a smaller company with a strong IT organization and digital sales strategy being an attractive target to a larger, more traditional insurer is gaining traction following the 2009 acquisition of 21st Century by Farmers and last month's Allstate buy of Esurance. But for smaller companies, IT can be a reason they sell to a larger firm. Regulatory changes in the US (Dodd-Frank) and in the EU (Solvency II) mean insurers will be required to meet new reporting standards. Smaller companies might not have the IT manpower or budget to do so, and could see a buyout as an option.
"Because of Dodd-Frank, some insurance companies may have to make upgrades in IT organizations that they may not be able to afford," David Simmons, a director in Deloitte Tax LLP's M&A division, said in a webcast on M&A issues June 21.
Regulation is also driving the strategic right-sizing to which Gibson and Towers Watson allude, Deloitte says.
"When insurers learn the capital requirements [of new regulations], it may lead to them divesting some businesses or acquiring some businesses," Boris Lukan, principal for Deloitte Consulting LLP and its U.S. P&C insurance consulting practice leader, added in the webcast.
However, as insurance companies grow larger through this increased M&A activity, there's a chance that regulatory momentum could mount. "Too big to fail" is a concern in other financial services sectors, and growing companies could attract the eyes of the public — and legislators.
"It's not quite the same issues [as the banking industry]. I think that when companies that are growing in a diversified way there's greater stability," Gibson says. "However, I do think there is some consideration of the systemic risk focus to also include insurance companies. Large insurers may well find themselves under the new regulations."
Nathan Golia is senior editor of Insurance & Technology. He joined the publication in 2010 as associate editor and covers all aspects of the nexus between insurance and information technology, including mobility, distribution, core systems, customer interaction, and risk ... View Full Bio