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2014 may bring more insurance M&A

Momentum continues to build for increased M&A: Deloitte report

A lacklustre economy and continued regulatory uncertainty contributed to the decline in merger and acquisition (M&A) activity in 2013, according to a recent Deloitte report.

But according to Deloitte’s report, 2014 Insurance M&A Outlook: Momentum Continues to Build, “industry observers are expressing cautious optimism about 2014.

“Insurance companies are searching for topline profitable growth, whether that is achieved by expanding into emerging markets with greater growth potential, or by diversifying via one-off, niche acquisitions to gain new products, technologies, markets, or distribution channels,” the report states.

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According to Deloitte, the US accounts for more than 40%, on average, of global insurance industry M&A activity in terms of aggregate deal value; however, during 2013 this activity fell by approximately 60%. There were 109 deals made by US and Bermuda companies on a global basis in 2012, and just 63 in 2013.

In addition to a decrease in the number of insurance industry M&A deals in 2013 versus 2012, there was also a significant decline in the reported aggregate deal value resulting from a decrease in average deal value.

That being said, the aggregate deal volume of Property and Casualty (P&C) transactions increased in 2013 compared to 2012, with the average deal size growing more than 2x, according to the report. There was only one transaction in 2012 that was in excess of $500 million, whereas there were four such transactions disclosed in 2013.

Looking to 2014, Deloitte says that an improving economy and well capitalized insurers could mean more M&A activity.

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“Entering 2014, momentum continues to build for increased insurance company M&A,” the report states. “There are potential buyers with readily available funds; among them, public entities, mutual insurers, PE-backed firms, and independent brokers. Additionally, rate increases which have been taking place across the board for a couple of years may be moderating, dampening an important source of topline profitable growth for commercial carriers and increasing the attractiveness of inorganic growth opportunities. Also, given the stock market’s rise in 2013 and poor start in 2014, more firms may conclude that valuations are peaking and it’s time to sell.”

When developing an M&A strategy, Deloitte suggests that insurance companies focus on economic and market activity, including interest rates and GDP growth; the regulatory environment; investment activity by private equity firms; capital management; and buyer/seller expectations.

“While 2014 may not see a significant increase in the volume of insurance industry M&A activity or any transformative deals, traditional companies may decide to expand their footprint by acquiring niche businesses, such as P&C insurers buying underwriting desks and letting the book of business follow the underwriters,” the report states.

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