Insurers Look to M&A: Deloitte Report

Terri Goveia | June 23, 2009

Insurers’ quest for new capital will likely drive mergers and acquisitions in 2009, says a new Deloitte report.

Although deals dwindled in 2008, the number of life and P&C companies looking to shore up capital combined with those divesting insurance operations and a weaker U.S. dollar has created a stronger M&A landscape, one characterized by new players and attitudes, according to The 2009 Insurance M&A Outlook.

The next wave of global M&A will see new players lead the M&A fray: with some insurers low on cash to make acquisitions, those in Asia and Europe are in a stronger position to buy than many of their North American counterparts, since they tend to have stronger foreign currency positions, and many have skirted investment losses, says Dave Simmons, Deloitte’s Insurance Mergers and Acquisitions Leader. Asian and

Middle Eastern sovereign wealth funds (SWF) are also likely market entrants—flush with some $3 trillion in assets, “it is likely that SWFs will seek to invest in insurance firms in the near future as Middle Eastern and Asian governments strive to increase the sophistication of their financial sectors by gaining access to needed resources and skills,” the report states.

Buyers will also move away from the “merger of equals” attitude that prevailed in the past, as insurers adopt an “all or nothing” approach to integration, the report notes. They will either buy a company and take a hands-off approach, or quickly absorb its operations into their own company, eschewing “attempts to identify and preserve the best of both predecessor organizations into the new, combined, entity.”

The report highlights the factors most likely to affect M&A activity this year, including short term considerations like M&A strategies, investment valuations, capital challenges, low valuations and integration challenges; and regulatory considerations like company regulatory changes, IFRS, reserve and tax issues.

IFRS, in particular, could benefit international M&A through its common accounting standards, better transparency, more consistent valuations and even reduce operating costs, according to the report, which points out that “the use of a single financial reporting standard could reduce global operating costs and facilitate the centralization of accounting systems,” noting that, “in some cases, the ability of insurers to use IFRS for both financial and statutory reporting will likely further reduce costs.”

The report urges insurers to fine-tune their M&A strategies, advising them to focus on growth, distribution and scale and suggests buying “underwriting teams” rather than legal entities to reduce risk. It also stresses the need for planning—to deal with increased competition—and the value of alternative structures to protect against further asset devaluations.