A new report from PwC has revealed the recovery in insurance M&A finding that the strategic importance of M&A to insurers across the globe is set to increase. However the report says that transaction volumes won’t recover along the same lines as during the last decade. Instead, the next few years will see a quiet revolution in global insurance M&A. In the short to medium term, low profitability will have a critical effect on insurance M&A. Weak profitability is closely linked to low investment yields, and is encouraging insurers in mature markets to seek domestic deals and to plan international expansion. The report also finds that technology will continue to grow in influence in insurance deals; political risks, the economic climate and regulatory reform will all continue to shape the market; and Asian and Latin American targets top the wish lists for insurers with capital to spend.

Nick Page, transaction services partner at PwC, said:

“The global insurance industry’s outlook is improving. The mature economies of Europe and North America are moving towards recovery, while the emerging markets of Asia and Latin America continue to grow. A pick-up in global premiums is forecast, but the industry should not expect a return to the old ways. Insurers are operating in a world where the goal of long-term growth seems to be getting further away. Instead insurers face a range of obstacles including persistently low investment yields, tightening regulation and overcapacity in many markets.

Key findings from the report include:

• Technology grows in influence
• Economics and regulation continue to mould the market
• Smarter pricing could reduce insurers’ combined ratios by 2-3%

Global insurance M&A will continue to generate a steady flow of midmarket transactions, punctuated by the occasional large-cap deal. Over time, M&A will see insurers sort themselves into three groups: Large international insurers with deep technical and financial resources; local and regional firms with distribution-led strategies; and niche players specialising in particular products or customers.

EUROPE

General Insurance

In Europe, tough market conditions and rising compliance costs are putting a premium on economies of scale. Non-core disposals by European banks and insurers will generate a stream of bolt-on targets for acquirers, but many general insurers will be prevented from making acquisitions by limited capital. Competition issues may also represent an obstacle in the region’s more concentrated markets. Fragmented markets are likely to see smaller insurers merging in the search for scale.

Regional growth opportunities will also become more sought after as general insurers facing slow growth in their home markets will also become increasingly alert to less mature markets closer to home. As some Western European insurers withdraw from Central, Eastern and South-Eastern Europe, others will increase their exposure to the region. As international firms develop regional networks, physical and cultural proximity could help to deliver lower costs as well as higher growth.

Life Insurance

There is potential for more inbound Western European deals. In the short term, inbound bids to Western Europe will remain rarer than in the last decade, when several US life insurers used M&A to expand in Europe. Would-be buyers could be put off by low dividends and the complexities of European life insurance. Low valuations in Europe could also represent an investment opportunity for buyers willing to take a longer-term view of the European sector.

Insurers from Asia-Pacific, the Middle East and other developing markets will acquire European businesses in search of greater expertise.