10 Reasons Why Insurance M&A Remains Slow

4) Valuations. This is a global economic issue, that many insurers are trading at what Deloitte considers to be a “discount book value.” By the same token, however, this makes those same insurers attractive to M&A when that activity picks up once more.

5) Alternative use of capital. The prolonged soft market and low return on equity, Deloitte says, make the insurance industry an unattractive one for newcomers, existing insurers and investors, which in turn is incenting those who could make deals to dedicate their capital elsewhere.

6) Emerging markets. For both P&C and L&H, the U.S. is a slow premium growth market, which makes domestic insurers less attractive to foreign buyers. Emerging markets in Latin America and Asia (particularly in India, Brazil and China), where premium growth is more robust, remain more attractive M&A territories. Moreover, some financial institutions, in part due to the European debt crisis, are selling off companies in Latin America and Asia, furthering activity there.

7) Catastrophes. This factor hits the P&C industry more than L&H, but the U.S. saw more than a dozen natural disasters in 2011 that caused at least $1 billion in damage—more than were seen in the entire 1980s. These catastrophes, Deloitte says, tend to reset pricing cycles and adversely impact earnings and surplus, all things that make any kind of deal more complicated. This concern multiplies under concerns that the world is entering a prolonged period of more severe natural disasters, producing even higher catastrophic losses.

8) Capital adequacy. What catastrophes are to the P&C sector, capital adequacy is to life insurance. Concerns over whether insurers have adequate surplus and capital largely stems from potential changes in statutory accounting regulations, which could suddenly increase surplus cash requirements. “Cash is king in making deals,” Deloitte says, and uncertainty in this area breeds reluctance for M&A.

9) Tax reform. Suggested changes to the taxation of life insurance products, offshore reinsurance and offshore insurance companies in general all create M&A uncertainty. Some tax reforms seem inevitable in 2012, such as life insurance taxation and individual and capital gains taxes for agents and brokers.

10) Lack of accretion. This is perhaps the most telling problem; that many insurance M&As have proved to build value. The failure rate is considered to be around 50%, Deloitte says, and the problem is that it is generating a reluctance among insurance executives to even consider M&A as a growth strategy. And of those who simply are holding off on considering deals, the skills needed to successfully conduct a merger or acquisition are perishable, and the longer companies go through dry spells, the harder it will be for them to rebuild the capabilities to navigate the M&A process successfully.