The life and health industry can expect to see continued sluggishness in mergers and acquisitions, thanks to a number of factors unlikely to abate any time soon. This comes from a recent report published by Deloitte that highlights the top 10 issues impacting insurance M&A for 2012.
“In general, insurance company M&A activity during 2011 was hamstrung by widespread uncertainty about the U.S. and global economies, regulatory reform, accounting reform and other concerns,” the report said.
The brightest spot was in broker and agency deal activity, which the study noted was once again the insurance market’s most active segment. The most active buyers, Deloitte said, were “serial acquirers of agencies embarked on a roll-up strategy of large and small brokers and agencies.”
In 2011, there were 238 insurance broker transactions, Deloitte said, up from 324 in 2012. On the low end, the deals were as small as under $100,000. On the high end, deals topped out at more than $1.2 billion. The average size of broker deals was $43.7 million, up considerably from $12.5 million in 2012 and $18.1 in 2009. This uptick, however, was skewed by two unusually large transactions, however.
“Unfortunately, many of the challenges stunting M&A activity in 2011 are likely to remain unresolved in the coming year,” Deloitte said, pointing to 10 prominent issues complicating matters for all insurance mergers and acquisitions:
1) Economic uncertainty. Low growth, high unemployment, stock market volatility and the European debt crisis all make for an unpleasant economic landscape both in the U.S. (which is showing slow recovery) and around the world.
2) Regulatory uncertainty. Provisions in both the Patient Protection and Affordable Care Act (PPACA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act have raised serious M&A concerns. Chief among them is the Dodd-Frank systemic risk designation, which could increase capital requirements and reporting standards for any company that fits the criteria as being a systemically important financial institution (or SIFI).
3) Solvency II. This long-delayed European insurance regulation would codify capital requirements for insurers, which for some companies would equate to needing to meet higher reserving levels, as well as investments in IT and enterprise risk management.
4) Valuations. This is a global economic issue, that many insurers are trading at what Deloitte considers to be a “discount book value.” By the same token, however, this makes those same insurers attractive to M&A when that activity picks up once more.
5) Alternative use of capital. The prolonged soft market and low return on equity, Deloitte says, make the insurance industry an unattractive one for newcomers, existing insurers and investors, which in turn is incenting those who could make deals to dedicate their capital elsewhere.
6) Emerging markets. For both P&C and L&H, the U.S. is a slow premium growth market, which makes domestic insurers less attractive to foreign buyers. Emerging markets in Latin America and Asia (particularly in India, Brazil and China), where premium growth is more robust, remain more attractive M&A territories. Moreover, some financial institutions, in part due to the European debt crisis, are selling off companies in Latin America and Asia, furthering activity there.
7) Catastrophes. This factor hits the P&C industry more than L&H, but the U.S. saw more than a dozen natural disasters in 2011 that caused at least $1 billion in damage—more than were seen in the entire 1980s. These catastrophes, Deloitte says, tend to reset pricing cycles and adversely impact earnings and surplus, all things that make any kind of deal more complicated. This concern multiplies under concerns that the world is entering a prolonged period of more severe natural disasters, producing even higher catastrophic losses.
8) Capital adequacy. What catastrophes are to the P&C sector, capital adequacy is to life insurance. Concerns over whether insurers have adequate surplus and capital largely stems from potential changes in statutory accounting regulations, which could suddenly increase surplus cash requirements. “Cash is king in making deals,” Deloitte says, and uncertainty in this area breeds reluctance for M&A.
9) Tax reform. Suggested changes to the taxation of life insurance products, offshore reinsurance and offshore insurance companies in general all create M&A uncertainty. Some tax reforms seem inevitable in 2012, such as life insurance taxation and individual and capital gains taxes for agents and brokers.
10) Lack of accretion. This is perhaps the most telling problem; that many insurance M&As have proved to build value. The failure rate is considered to be around 50%, Deloitte says, and the problem is that it is generating a reluctance among insurance executives to even consider M&A as a growth strategy. And of those who simply are holding off on considering deals, the skills needed to successfully conduct a merger or acquisition are perishable, and the longer companies go through dry spells, the harder it will be for them to rebuild the capabilities to navigate the M&A process successfully.