Insurance M&A activity to pick up in 2017: Conning

Mergers and acquisitions (M&A) activity will pick up in 2017 across all insurance sectors, driven, among others, by soft market conditions and insurers seeking scale, according to a study by Conning.

The property/casualty (P&C) sector should continue to be fuelled by strong fundamentals, such as an overabundance of capital, fewer organic opportunities in a soft market, and pressure on expense ratios and earnings, according to the study named ‘Global Insurer Mergers & Acquisitions in 2016’.

Optimism regarding the US growth outlook should drive continued focus on North American targets. Foreign capital, particularly from Japanese owned companies, should be a key driver for larger transactions.

In the life sector, there may be more optimism given the outlook for interest rates, according to Conning. The health sector will continue to be beset by regulatory uncertainty related to the ACA, but pursuit of business that adds scale in government plans and improved cross-market positioning will continue, particularly by the largest competitors.

Conning also anticipates an accelerated return to M&A activity now that the companies involved in the mega-mergers are refocused on pursuing their respective strategies rather than integration and cost savings.

M&A Drivers

Soft market conditions continue to be a key driver of M&A activity for the P&C industry. Despite deteriorating earnings, reserve releases, and expense ratios, another year of low catastrophe activity means companies continue to have excess capital. Absent a significant dislocation event, the soft market appears to be a driver going forward.

With poor underlying premium rate fundamentals in the P&C sector, insurers have sought consolidation to attain scale and heighten efficiency. In the face of continued high expense ratios, companies across the board have been proactively pursuing expense reduction initiatives.

Continuation of soft market conditions in 2017 constitutes headwinds on expenses and will contribute to exploration of consolidation and smaller acquisition opportunities that can accelerate market entry as compared to organic growth initiatives.

Long-term downward pressure on interest rates continues to be a drag for longer-tailed lines and most significantly for the life insurance industry. There is some more recent optimism in the interest rate outlook. The outlook for interest rates is changing, but these changes will take time to work their way through the investment portfolio.

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