Posted on Mar 13, 2013 by Sergio Ulloa
A report released by Deloitte L.L.P. on Tuesday has revealed good news for several sectors of the insurance industry. According to the report, titled 'The Top 10 Issues for Insurance M&A in 2013: Time for Mergers and Acquisitions to Take Off?' the insurance industry should be seeing an increase in mergers and acquisitions in certain sectors this year.
The increase in M&A (merger and acquisition) activity is reportedly due to favourable market and economic conditions this year compared with 2012, leading to an increase in deals being made. The favourable conditions can be attributed to a number of factors. The report determined that, despite organic growth opportunities seeming to be limited in the insurance industry, firms are "holding large amounts of excess capital that need to be deployed; and the stock market is doing well". These conditions generate confidence in the industry and lead to the predicted increase in M&A. This will allow insurance firms to "expand [their] market share, distribution capabilities, product/service offerings, and economies of scale".
Primarily, the Deloitte report highlighted the Property and Casualty (P&C) sector as likely to see an increase in M&A deal activity. Last year, property and casualty insurance firms suffered a slow rate of growth and deal volume, especially towards the end of the year. This was due to precautions taken when determining the P&C companies' "exposure from Superstorm Sandy". Superstorm Sandy was an enormous hurricane that raged along the East coast of the United States of America in late 2012 and caused excessive damage to many properties, leaving several people homeless and without electricity. Now that Sandy's impact has been assessed, and the costs have been absorbed by insurers, the report proposes that deals in the P&C sector will increase throughout 2013. P&C companies that were exhibiting caution are now predicted to "improve their performance or revenue expectations" through pushing for "specialty line acquisitions that hold better value".
A further area highlighted in the report as due for increased deal activity was the insurance intermediary sector. Brokers and agents remain a successful area in the insurance industry, and organisations in this sector have been "focussing on acquisitions that can provide additional clients and revenue sources", this is in order to help drive growth and increase the number of M&A deals.
In contrast, Deloitte were less optimistic regarding M&A deals in the reinsurance sector. This is due to several factors including low valuations and excess capital that are predicted to keep M&A activity low. The report stated that several of the organisations in the reinsurance market "are trading at discounts to their book value" which complicates and confuses transactions, as it creates a disconnect whereby "the buyer may likely need to issue more shares than contemplated and the seller may likely need to accept an offer below book value".
Overall, the Deloitte report suggests a year of positive growth for the insurance industry. As shown, this will be especially experienced in the property and casualty sector, while in contrast, the reinsurance sector may remain stagnant or see less M&A deals.
You can see the Deloitte report here