North America made up 24% of global insurance deal making by value in first half of 2013

North America accounted for 24% of global insurance deal making by value during the first six months of 2013, a period in which global insurers increased mergers and acquisition activity, Towers Watson reports.

“There should be cautious optimism surrounding the insurance sector and related M&A across North America,” Jack Gibson, global lead for insurance M&A for Towers Watson, suggests in a statement from Towers Watson, a global professional services company.

“Deal making is being driven by consolidation as a response to depressed premiums and more stringent capital requirements. This is pushing firms to expand into new product areas to diversify risk and maximize return on capital,” Gibson explains.

A recent survey of 255 senior insurance executives – conducted by Towers Watson in conjunction with global intelligence provider Mergermarket – asked about their outlook for global M&A in the insurance sector. Respondents were from life, property and casualty and composite insurers, as well as reinsurers.

It is anticipated the trend of increased insurance M&A will continue, with 77% of respondents saying they foresee an increase in the next one to three years, notes Towers Watson. The value of global insurance M&A deals completed in the first six months of 2013 was 44% higher than during the first half of 2012.

Towers Watson reports the principal drivers for M&A activity vary among the types of insurer: in the life sector, respondents rated general economies of scale as the most important influence on deals; in the p&c sector, composite and reinsurance firms, the need to find growth by expanding into new territories and business segments was paramount.

Many companies display a regional “home bias” for where they are likely to target their M&A activity, the statement notes. There is universal agreement that the Asia Pacific region provides the most attractive opportunities over the next three years, while North America rates second least attractive.

However, valuation gaps remain a significant challenge to the market, with acquirers seeking a global average of about 15% return on capital. “Further pressure on valuations may come from the fact that only a fifth of respondents said they are planning to divest operations in the next three years, compared to 34% that have completed one or more divestments in the past three years,” notes the Towers Watson statement.

“If you combine fewer plans for companies to divest with an increased appetite for acquisitions, we could see the possible reemergence of a seller’s market driving competition for assets, which would reduce target returns and raise valuations,” Gibson says.