Mergers and acquisitions will increase later this year as U.S. insurers and financial institutions shed non-core insurance businesses to boost capital, according to a study released Monday by Deloitte. This will present opportunities for strategic buyers and sovereign wealth funds to expand into new markets.
“As we entered 2009, the primary challenge for some life and property and casualty (P&C) insurance companies had shifted from finding ways to deploy excess capital to raising new capital. While both the life and P&C segments have experienced investment write-downs, the life segment has been hit the hardest. The volatility in the financial markets caused more stress in the system particularly for those life insurance companies with guarantees on their variable annuities,” said Rebecca Amoroso, head of Deloitte’s U.S. Insurance practice in a statement. “As a result, many life and P&C firms are experiencing significant losses of capital as well as downturns to their ratings. In this environment, raising capital, divesting non-performing or capital-consuming businesses or seeking protection from better capitalized firms emerges as a priority.”
“There is currently an imbalance in supply and demand, with more companies seeking to divest than companies seeking to acquire. In this situation, the question becomes who will buy and how will they finance an acquisition given the decline in corporate stock’s allure as an acquisition currency and tight credit market conditions. In the current environment, Chinese and Japanese companies with strong foreign currency positions, and those Bermuda and European insurers that avoided major investment losses, may be the strongest candidates to make acquisitions,” said Dave Simmons, Deloitte’s Insurance Mergers and Acquisition leader.
“Sovereign wealth funds may also seek to invest in insurance companies as Middle Eastern and Asian governments strive to increase the sophistication of their financial sectors by gaining access to needed resources and skills. As financial and credit markets stabilize, we expect strategic buyers to re-enter the market, take advantage of the supply-demand imbalance and a new wave of consolidation to occur.”