U.S. insurers expecting more M&A activity this year over last

More insurers expect to be involved in a merger or acquisitions as a buyer over the next year than did last year, although costs for certain technology and new regulations remain concerns for overall business growth, according to a new industry outlook report from KPMG.

In its survey of 95 senior insurance executives from companies in a range of sizes based in the United States, 54% said they expect to be involved in M&A activity as a buyer over the next year, compared with only 34% in a similar survey last year.

Among those, 19% said they are “very likely” to be involved in a merger or acquisition as a buyer, up from just 10% in the 2013 survey. Additionally, 35% said they were “somewhat likely,” up from 24% the year before.  

The number of executives who said they had no plans for M&A activity also dropped significantly from 41% in 2013 to 21% this year.

“M&A activity is expected to ramp up in the next year as insurers leverage their strong capital positions to seek profitable growth, enter new markets and rationalize non-core operations,” Laura Hay, national leader of KPMG’s Insurance practice commented in a release on the report.

“P&C insurers are acquiring companies with enhanced technology platforms to gain a competitive edge and view M&A as a crucial means to increase their distribution capacity.  Meanwhile, life insurers are expanding their traditional product portfolio to include annuity and investment management capabilities to address the needs of baby boomer retirees.”

Of the primary drivers of M&A activity over the next year, executives most frequently cited “access to new markets and geographic areas” (45%); “regulatory changes and pressures” (45%, up from 36% in 2013); “access to new technology and products” (37%, up from 29% in 2013); and “improved use of capital” (24%).  

Overall, “customer demand and changes in customer focus, buying patterns and preferences” was seen by 52% of respondents to be the primary driver of transformation for their business, followed by “coping with changes in technology” (45%) and “domestic competition” (42%).

In terms of the highest-priority investment areas for their company over the next year, respondents cited “strategic acquisitions” (34%, up from 22% in 2013),“customer programs” (25%, up from 23% in 2013), and “information technology” (24%).

Over the next two years, respondents said they are primarily looking to boost their technology investments for “customer growth and customer service” (27%), “data and predictive analytics” (26%) and “risk modeling and analysis” (24%).

However, 37% of respondents also indicated that cost is the main challenge to implementing and supporting more sophisticated data and analytics.

“Following the financial crisis, insurers were not in a position to make significant investments in their businesses, but now they realize they need to improve operations to win in the marketplace—with a focus on customer-centric strategies,” Hay noted.  

“Those insurers who make investments in predictive analytics and modeling, and leverage data to gain a 360 degree view of the customer and effectively manage risk stand to rise above the competition.”

New regulation and legislation were also seen as primary threats to business models by 34% of respondents. They also cited “losing share to lower-cost producers” (31%), the “speed/magnitude of the economic recovery” (23%), “lack of job growth” (18%) and “cyber-threats” (17%) as threats.

In terms of the potential regulatory changes that would have the most impact on their businesses, respondents cited “the need to manage multiple capital requirements” (35%); “changes to the insurance contract standards by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB)” (31%); “healthcare reform” (23%); and “group and cross-border supervision” (22%).

“The global regulatory landscape continues to emerge as a key deal catalyst as insurers consider the continued implementation of risk based capital and capital management initiatives,” Ram Menon, KPMG’s Insurance Sector Lead Partner for Transactions & Restructuring noted in its statement.

“Initiatives like the Asset Quality Review for the banking sector in Europe are expected to result in a more rigorous assessment of whether insurance businesses are considered core or should be sold.  In addition, high growth countries like China, India and some Latin American jurisdictions, which do not have enough capacity to meet the needs of retirees, are in discussions to relax regulatory barriers to encourage foreign direct investment.”