Insurance M&A activity in the U.S. could pick up this year, says Deloitte

Merger and acquisition activity in the U.S. insurance market may take off this year, after a relatively quiet 2012, but challenges remain in making such deals, notes a report from Deloitte.

Last year there was a 20% decrease from 2011 in the number of M&A deals, notes the report, Top 10 Issues for Insurance M&A in 2013, released Tuesday. That was largely because of concerns around the U.S. and global economies, and regulatory uncertainty, among other issues.

Come of last year’s challenges remain, but M&A may not be as hampered this year, Deloitte says.

“Entering 2013, the environment seems more conducive to accelerating M&A activity than a year ago: organic growth opportunities appear limited; insurance companies and PE firms are holding large amounts of excess capital that need to be deployed; and the stock market is doing well overall, which generates confidence,” the report says.

Still, economic challenges remain, particularly with low interest rates, Deloitte suggests. Deals are also becoming increasingly complex in structure, as some companies may be looking at selectively selling off business lines or leaving geographies, rather than selling an entire business, the report notes. As a result, deals may take longer to negotiate and execute.

Regulatory changes, such as Solvency II capital requirements for European businesses and the Own Risk and Solvency Requirement (ORSA) in the U.S. will also continue to have an impact on deals, as some companies may reconsider how and where they do business, the report notes.

This year, Deloitte says it expects many companies to invest in emerging markets that have higher growth and profits with less competition.

As insurers wrap up estimates of claims payouts from last year’s Superstorm Sandy, M&A activity could also be sparked, “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,” the report notes.

While possible tax reforms still remain unclear, it may be difficult to factor that into possible deals this year, Deloitte notes. “The insurance industry should stay tuned, monitor and influence the situation, and start scenario planning upon hearing of specific bills or legislative changes that could change tax laws,” the report suggests.
The full report is available on Deloitte’s website.