The global insurance industry experienced a significant increase in M&A deals in 2015 that is likely to continue in 2016–2017, although at a slower pace, says Timetric’s Insurance Intelligence Center (IIC).
Insight Report: M&A in the Global Insurance Industry, which is available at the IIC, says an increasing number of high-value deals led to a 176% rise in total deal values from US$74.2bn in 2014 to US$204.5bn in 2015.
North America was the largest M&A market in the global insurance industry during 2011–2015. The volume of deals executed in 2015 was 522, slightly less than the 545 made in 2012. However, the total value of deals in 2015, at US$140.9, was the highest during 2011–2015.
By contrast, the volume of M&A transactions in the European insurance market during 2011–2015 was lowest, at 187 deals, in 2013. In fact, the volume of insurance deals was almost unchanged during 2013–2015. This was partly a result of uncertainty over the implementation of Solvency II, which came into force on January 1, 2016.
M&A activity in the insurance industry has been historically dominated by North America and Europe.
And the IIC report says mature markets in North America and Europe will continue to dominate M&A activity in the global insurance industry, despite opportunities in high-growth markets in emerging Asia, Africa and Latin America.
This domination can be explained given the size and maturity of the insurance market.
Insurance groups from mature economies will continue to expand by engaging in cross-border transactions, particularly in emerging economies in Asia, Africa and Latin America. Mature Asian economies such as Japan and cash-rich business groups in China will continue to search for complimentary assets in Europe and North America.
The IIC report says insurers planning inorganic growth need to have strong strategies in place, as prices of attractive targets are expected to increase as competition among acquirers rises. Surplus capital through alternative sources, lack of organic growth opportunities, low investment returns and evolving regulation are expected to maintain momentum in M&A.
Most M&A deals in the global insurance industry emerge from mature economies, particularly the US.
However, the IIC report says this is likely to change as an increasing number of international insurers in developed economies intend to enter emerging high-growth markets through M&A, in search of growth and scale.
The number of outbound M&A deals from North America and Europe to emerging high-growth markets is therefore expected to rise, as diversification and targeted growth are the key drivers.
Innovative business models, enhanced distribution channels, regulatory reforms and high prospects of economic growth are attracting international insurers to high-growth markets in Asia, Africa and Latin America.
The IIC notes these markets have the potential to provide impetus to slow premium growth in mature economies.
High economic growth, rising middle-class populations and low insurance penetration rates increase the propensity to generate higher premium growth for both domestic and international insurers in emerging high-growth markets. However, lack of transparency in due diligence and differences in price expectations are often hurdles in developing markets.
Regulatory developments to increase M&A activity
Regulation has been a leading driver of M&A activity in various insurance industries.
More precisely, the introduction of risk-based regimes necessitating high capital requirements, and new rules providing incentives for diversification and divestment will continue to force insurers engage in M&A activity.
According to the IIC report, the introduction of risk-based regulatory regimes such as Solvency II in Europe can result various strategic implications such as business diversification, risk mitigation, simplification of business models and portfolio rationalization. The enforcement of risk-based regulation in other jurisdictions will have similar impacts on the M&A environment.