Top 10 Issues Surrounding Insurer M&A in 2013
For years, insurance M&A was primarily focused on bolstering a company's scale, geographic presence, or products/capabilities, but many of today's acquisitions are driven by the industry's need to secure high-quality talent.
While it may not yet be prudent for insurers to make tax reform a key consideration in their 2013 M&A strategy, insurers should stay tuned, monitor and influence the situation. Also, upon hearing of specific bills or legislative changes that could change tax laws, they should start scenario planning accordingly.
It is estimated that insurers could finalize estimates for Sandy-related payouts by late first quarter/early second quarter 2013. This may spur M&A activity as some P&C companies look to diversify into other types of insurance and those organizations whose capital strength allowed them to absorb Sandy-related losses seek to acquire assets from competitors who did not fare as well.
As an alternative to investing in organic growth or domestic businesses, some large insurers are making focused M&A investments in Latin America, Asia and other re-emerging markets. When considering investments in such markets, however, companies should first assess whether growth prospects there hold long-term promise, especially when weighed against potential regulatory and operational challenges.
Due to the ongoing discount-to-book issue, many insurers with excess capital have been buying back stock rather than transacting M&A deals. Some have been exiting certain lines of business or markets and using that capital to shore up remaining operations and older acquisitions, comply with capital adequacy requirements, or pay back shareholders. There has also been more interest in putting capital back into the business to drive organic growth by upgrading core infrastructure, IT platforms and other back-office systems.
Many insurance companies are still trading well below historical book value. If the stock market experiences a major drop in the coming year, it could exacerbate the situation and dampen future M&A activity. Many companies are anticipated to focus on acquiring new or expanded distribution channels versus products, to better differentiate themselves in an increasingly homogenized marketplace.
Evolving regulations on capital requirements may hold implications for industry M&A in 2013. Requirements emanating from Solvency II have already prompted organizations like HSBC to divest unattractive businesses, Aviva to exit the U.S. market and ING to exit Asia. While the United States is not changing its capital requirements to the same extent as Europe, insurers should begin planning their responses to ORSA and the adoption of principles-based reserving.
Private equity firms' appetite for insurance M&A appears to be increasing, especially in the variable annuities spacee.g. private equity firms made over 100 acquisitions in the industry in the 24-month period ending Dec. 31, 2012. A continued softening in sale prices makes the segment attractive for financial investors who are looking for cash flows they can manage aggressively and sell.
Many of 2012's M&A deals were highly structured transactions; among them, companies unwinding themselves by selling subsidiaries or lines of business, etc. With the growing complexity, potential acquirers need to be prepared to move quickly when a viable candidate is identified and due diligence needs to be conducted during the target screen process.
2012 insurance M&A was stunted by widespread economic stress and regulatory uncertainty. Clarity around other legislation and regulations of importance to the industry could help to instill some confidence and reignite interest in strategic M&A in 2013. Although low interest rates could continue to be a drag on activity, slow economic improvements could offset that, and help renew interest in scenario planning and stress testing for M&A deals.