M&A activity rising, but well below pre-financial crisis levels: Swiss Re study

Merger and acquisition (M&A) activity in the insurance industry is rising, although the number of deals remains well below levels seen before the financial crisis of 2008-08, says a new study released on Tuesday by Swiss Re.

The latest Swiss Re sigma study, titled M&A in insurance: start of a new wave?, noted that globally, there were 489 completed deals in 2014, compared with 674 in 2007. “In recent months activity has picked up again, while the pipeline of future deals has also increased: total M&A announcements in the second half of 2014 rose to 359 from 295 in the first half, and this momentum continued into 2015,” Swiss Re, a wholesale provider of reinsurance, insurance and other insurance-based forms of risk transfer, said in a media release. “Survey evidence also indicates that sentiment towards M&A is turning as confidence about the economic outlook gradually improves and market participants look to acquisitions or mergers to boost profitability as well as bolster their balance sheets.”

For p&c insurer acquisitions by target region (based on transaction value and where the value of the transaction is publicly disclosed), from 2001-07, North America was 83%, Europe 11%, Asia Pacific (6%) and Latin America and Carribean (0%), the study showed. From 2008-14, North America was 60%, Europe 10%, Asia Pacific 22% and Latin America and Carribean (8%). [click image below to enlarge]

Swiss Re said that the recent M&A upswing is largely concentrated in certain sectors, such as specialty re/insurers and insurance intermediaries. “What’s happening is a squeezing out of the middle-tier specialist re/insurer,” says Kurt Karl, Swiss Re’s chief economist, in the release. “Some firms do not have the scale or the breadth of services to differentiate their offering from more commoditized reinsurance capacity. Going forward, we expect to continue to see a certain shakeout in the sector as companies join together in search of revenue and cost synergies.”

Beyond the specialty re/insurance sector, there have also been strategic deals to expand expertise, distribution capabilities and geographical reach. There has been a pick up in M&A activity in the emerging markets, particularly Asia Pacific and Latin America, with advanced country insurers continuing to focus on expansion in high growth markets. Increasingly too, emerging market insurers are eyeing acquisitions in advanced markets as a way to diversify geographically and across business lines, Swiss Re said. [click image below to enlarge]

Swiss Re suggested that the upturn will remain sector specific. “Moreover, the increase in activity is not an industry-wide surge, and is unlikely to become one,” the release said. “The still considerable uncertainty about the global macroeconomic and regulatory outlook makes selecting value-enhancing deals challenging, which will restrain firms’ appetite for M&As.”

Instead, there will likely be a continuation of recent trends of increased M&A activity in certain segments as firms respond to cyclical and structural changes in the industry. Access to digital distribution technology is another M&A driver that will likely carry increasing weight, the study noted.

The track record of M&A success in insurance, as in other industries, is mixed, Swiss Re concluded. Empirical analysis of share price developments of insurers involved in an M&A over the past decade suggests positive returns for buyers in the long run, but there is a wide variation across transactions.

“Those deals that seem to most consistently create value are ones where companies are from the same country and those that combine firms on different parts of the insurance value chain,” said Darren Pain, co-author of the report.