M&A activity on the rise: Towers Watson

55% of P&C companies are considering an acquisition in the next year.

The insurance industry should expect a sharp increase in merger and acquisition (M&A) activity over the next few years, both in the P&C and life insurance markets, according to a Towers Watson survey of North American insurance CFOs.

“There is also a pent-up demand from private equity and other financial entities that is ready to be deployed,” said Jack Gibson, Towers Watson’s managing director, global mergers and acquisitions. “Regulatory changes around the world, and the continued uncertainty of the implementation of these changes, have caused a short-term decline in M&A activity, but will ultimately prove to be a significant catalyst for increased activity over the medium to longer term.”

P&C Insurance Survey

Among those P&C CFOs surveyed, 55% noted that they were considering acquiring a company in the coming year. Few respondents (15%) said they plan to divest or merge.

Bruce Fell, a managing director in Towers Watson’s P&C practice, said that some of the CFO survey findings could speak to the need for companies to maintain strong cash positions and balance sheets in order to pursue such transactions or fend them off, as the case may be.

“CFO survey findings suggest that the difference between the demand for companies and blocks of business, and the intention of respondents to divest companies or blocks of business, or both, could flag a shortage in the future,” said Fell, who noted that over the past 12 months, 30% of respondents acquired or pursued a company, while 20% acquired or pursued a block of business.

The survey also pointed to the fact that companies interested in inorganic growth would be wise to develop a strategic plan to be ready for strong acquisition demand and short supply—especially in a global market, where the largest companies will likely be the industry leaders.

“While attractive prices and the low cost of financing may have encouraged companies to make acquisitions over the last year, a deeper examination suggests that respondents are looking at M&As strategically, with attractive pricing a secondary consideration,” Fell said.

This strategic approach surfaces throughout the survey. Product positioning, financial performance, the elimination of competitors and global presence are all reasons why survey participants completed or are considering M&As. Thirty-nine percent of respondents that have considered or undertaken an acquisition in the last year or plan to do so in the coming year view M&As as a way to expand or enhance product offerings. Enhancing financial performance was cited by 31% of respondents, and improving capital position by 15%. Elimination of potential competitors was cited by 8%.

Among other key findings from the P&C CFO survey:

  • When asked about drivers that would increase deal activity, companies cited expansion into attractive geographies or markets (47%), achieving economies of scale or scope (42%), and an increased market presence (32%) as top drivers.
  • While 45% of respondents expect to expand their presence in the US over the next year, some are targeting areas outside the country, including Asia (15%), Canada and Latin America (both at 10%), and Africa (5%).
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Transcontinental Media G.P.