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Towers Watson CFO Surveys Signal Increased Deal/M&A Activity in the Insurance Market in the Coming Years

Posted on 08 Feb 2012

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The insurance industry should expect a sharp increase in merger and acquisition (M&A) activity over the next few years — both in the property & casualty (P&C) and life insurance markets, according to global professional services company Towers Watson.

“Despite several global catastrophes over the past 12 months and continued economic volatility, companies will turn their collective attention from internal concerns and increase their focus on M&A,” said Jack Gibson, Towers Watson’s managing director, global Mergers and Acquisitions. “There is also a pent-up demand from private equity and other financial entities that is ready to be deployed. 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.”

Further underscoring the assertion of a potential uptick in M&A activity are the results of two recent surveys conducted by Towers Watson — one of North American P&C insurance CFOs, the other of North American life insurance CFOs.

Among those P&C CFOs surveyed, 55% noted that they were mulling acquiring a company, while 50% said they are interested in purchasing a block of business in the coming year. Few respondents (15%) said they plan to divest or merge.

As for life insurance CFOs, 59% said they were considering buying a company, while 50% said they were thinking of buying a block of business — underscoring the belief that impediments to acquisitions, particularly capital issues, appear to have diminished somewhat over the past two years.

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. “We see the biggest drivers for increased deal activity are expansion into new markets and gaining economies of scale. Future impediments could include continued economic uncertainty and capital constraints.”

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 U.S. over the next year, some are targeting areas outside the country, including Asia (15%), Canada and Latin America (both at 10%), and Africa (5%).

Almost without exception, 2011 survey respondents see fewer hurdles to M&As than did respondents to the Towers Watson Life CFO Survey on M&A issues in 2009. Most notably, only 29% of this year’s respondents view capital issues and constraints as impediments, compared to 77% in 2009. Further, only 38% of respondents to the current survey view general economic conditions and uncertainty as impediments, compared to 50% in 2009.

“According to our CFO survey, extensive preplanning and comprehensive communication are as important as the price paid and other financial factors,” said Gibson. “This survey result underscores the importance of early focus on these people-related issues coincident with, if not prior to, the time when the financial terms of a deal are being negotiated.”

Additional highlights from the Life CFO Survey:

    •    Over half of CFOs have undertaken alternative forms of capital raising in the last year, with third-party reinsurance and direct debt issue the top two forms.
    •    CFOs reported experiencing far less reduction in capital or surplus as a result of economic volatility than they did in 2009.
    •    Respondents expressed doubts as to the number of blocks or companies that may be available: 38% do not believe there are enough companies or blocks of business of the right size for sale, up from 32% in 2009.

About the Survey

P&C: Twenty CFOs from P&C insurance companies participated in Towers Watson’s second North American Property & Casualty Insurance CFO Survey, which was conducted between mid-October and mid-November 2011. Survey respondents represent a variety of business types and ownership structures. CFOs represented local and regional carriers, along with national carriers and multinationals. Respondents represent a cross section of companies of all sizes and a variety of distribution systems.

Life: Twenty-two CFOs from life insurance companies participated in Towers Watson’s 29th North American Life Insurance CFO Survey, which was conducted in September and October 2011. The survey focused on issues related to M&As and capital management. Respondents primarily included CFOs from large and midsize North American life insurance companies.