International insurers ‘regaining appetite’ for M&A deals

International insurers across all lines in the Europe, Middle East and Africa region are “regaining their appetite for mergers and acquisitions,” according to a new survey from Towers Watson.

Of more than 250 senior M&A executives interviewed as part of the survey, conducted in partnership with global intelligence firm Mergermarket, seven out of 10 said their companies were planning a transaction over the next three years.

Slightly more than that (77%) said they expect an increase in insurance M&A in the next one to three years. Of those surveyed, 39% said they have completed an M&A transaction over the past three years, according to Towers Watson.

Among P&C insurers, composite insurers and reinsurers, M&A activity is seen to be driven by the need for growth by expanding into new territories and business segments, according to the firm.

Nearly half (45%) of respondents said they see private equity firms as a driving force behind deal-making, Towers Watson also notes.

The firm also notes that the value of global insurance M&A deals last year was the second highest in the past eight years, and in the first half of 2013, the value of deals completed was up 44% over the same period in 2012.

However, only a fifth of respondents said they are planning to divest operations in the next three years, compared with 34% that have completed one or more in the past three years, according to the results.

“If you combine that with the increased appetite for acquisitions, the possibility of a re-emergence of a seller’s market is likely to result in competition for assets and elevated valuations,” Andy Staudt, EMEA P&C insurance M&A leader at Towers Watson commented in a press release.

Acquirers are also looking, on global average, for a return on capital of 15.2% (13.8% in Western Europe and 17.2% in Africa and the Middle East), Towers Watson says, suggesting that valuation gaps are a challenge for the market.

“These rates may be an obstacle to deals as only a limited number of targets will likely generate such high returns,” Fergal O’Shea, EMEA life insurance M&A leader at Towers Watson noted in the release.

“Especially when looking at consolidation in developed markets, returns of this level generally require large expense savings or other synergies to be delivered – which carry risk in themselves.”

Asia Pacific was the region seen as most attractive for opportunities over the next three years, although 55% of those surveyed said that Solvency II regulation in Europe would promote acquisitions because of restructuring and capturing diversification benefits, according to the research.