Insurers place their bets | KPMG | SG

Insurers place their bets: Where to play

Insurers place their bets: Where to play

Many insurance companies are at a crossroad when it comes to setting their M&A goals. On the one hand, insurer’s balance sheets are generally strong, with ample funds to make opportunistic deals. On the other, returns on deal investments are declining as growing competition pushes valuations up.

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According to our research, 84 percent of insurers plan to target 1-3 acquisitions in 2017. And 94 percent said they would undertake at least one divestiture this year, suggesting an encouraging environment for deal-making overall. Insurers are clearly hungry for good M&A opportunities. And the vast majority of respondents to our survey reported that they expect to undertake domestic acquisitions over the coming year. A significant number also seem keen to use the current environment to expand their foreign operations and footprint.

Two-thirds of insurers said they expect to undertake a cross-border acquisition. Given that around 55 percent of our respondents currently operate in five markets or less, this suggests that some insurers will be looking at opportunities in new markets and regions.

Asia in the acquisition cross-hairs

While the US remains the top national market where insurers expect the most deal activity, our data suggests that from a regional perspective, insurers are much more focused on finding potential acquisitions in Asia.

The emerging markets of Indonesia, India, China and others remain largely untapped in terms of premium density – low levels of insurance premium per capita combined with large domestic population’s present significant opportunity for additional scale in the medium-long term. However, with the largest market share in the global insurance industry, the US continues to provide a great opportunity for acquirers and investors looking for diversification of risks and earnings, and those seeking fast access to traditional and innovative operating capabilities. Asia on the other hand, represents an emerging mass market where insurers can find varied long-term strategic growth opportunities.

Western Europe up for sale

While acquirers are looking to Asia and North America for targets, our data suggests that Western Europe will be the region with the most assets up for sale, led by the UK, Italy and Spain.

Driven largely by Solvency ll, Europe will see the majority of divestitures. The ‘grow’ or ‘go’ decision is driving the focus for insurers with operations in Western Europe. If you exclude the largest insurers, all the other players in the single markets are rethinking or reviewing their strategies. However, there continues to be ongoing concerns about the prospects for economic recovery in the region. Some expect to see slower growth, lower business investment rates and, as a result, heightened competition. “European insurance companies will continue to be challenged on both sides of the balance sheet in 2017,” suggested one of our survey respondents from a large US-based reinsurer.

Valuations remain relatively palatable

According to our interviews, buyers and sellers should find common ground for deal-making. Sixty-six percent of sellers are hoping to divest businesses valued at between US$250 million and US$1 billion, and at the same time, 70 percent of potential buyers are hoping to buy businesses of that size. While respondents seemed fairly happy with current valuations in the life and reinsurance segments, almost two-thirds said current valuations in the non-life sector were too high.

“The general insurance market remains attractive due to ongoing sector convergence. Further, sector convergence is also shifting the commercial market, with some players buying prevention capabilities and others selling bad books to improve their reserve position, noted Matthew Smith, KPMG in the UK.

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