Mergers and acquisitions in the insurance industry rose by 176 percent between 2014 and 2015, the transactions driven by a host of factors, including a long-standing drag on the industry: continuing low interest rates.
Timetric discloses this finding in its “Insight Report: M&A in the Global Insurance Industry.” The report discusses in detail the trends and drivers which affect M&A activity in the global insurance industry. The report attributes much of the M&A activity to the business environment, including continuing low interest rates, regulatory developments, changing customer preferences, the availability of surplus capital, and technological advances.
An increasing number of high-value deals in the insurance industry boosted insurance deal values to US$204.5 billion in 2015 from US$74.2 billion in 2014. The emergence of M&A waves in the insurance industry has contributed significantly to the global M&A environment, the report notes.
The study adds that challenging economic and market conditions are impacting all insurance operators, including brokers and service providers. depressed premium growth and low investment returns are also forcing insurers to engage in M&A activity.
Among the report’s highlights:
Persistent low interest rates as a result of the financial crisis have constrained insurers’ overall revenues and profitability, particularly in developed economies. This has encouraged insurers and reinsurers to streamline their operations, divest non-core businesses and rationalize investment portfolios, leading to an increase in M&A deals.
Banks, too, are experiencing capital constraints in the challenging economic environment, particularly in mature economies. This is forcing banks to divest or reduce stakes in insurance subsidiaries to raise capital and focus on core operations. The trend has also added to M&A activity in the global insurance industry.
M&A transactions for run-off portfolios, particularly in the US and Europe, are expected to surge, as insurers divest capital-intensive legacy insurance products. With billions of inactive books of insurance business, there is an immense opportunity for insurers specializing in generating value from legacy portfolios.
Insurance broking continues to attract private equity (PE) investors with a number of M&A transactions. Historically, investments in insurance broking firms have been preferred by PE firms. The fee-based nature of broking, delivering stable cash flows with low balance-sheet risk makes it an appealing target for PE investors. The dynamics of insurance broking can enable PE firms to achieve higher returns and exit the business in a defined period.