While deal volumes on both the buy and sell side are expected to continue to rise, we are seeing a continued shift in motivations for deal activity.
Companies seeking to expedite growth, address new market conditions and improve their bottom line may need to change course and rework their core financial, business and operating model. Making a well-considered move to acquire a non-traditional insurance firm or forge a strategic partnership can be the key to meeting critical strategic goals and outperforming industry competitors and new market entrants. The stakes have never been higher, as new, more agile and technically-savvy entrants firmly take their place in the hearts and minds of customers.
Transformation outcomes are now top of the agenda for most insurers. Two-thirds of our survey respondents note strong demand for acquisitions that would help transform their business model (where they play), while just one-in-five said they were looking at acquisitions to improve their operating models (how they win).
In many cases, insurers are looking for opportunities to capture new capabilities to address gaps in their current business, or completely transform the organization. “In the US, insurers are increasingly targeting small and medium-sized enterprises that offer something they currently do not have,” noted the director of corporate development and strategy and one large American life insurer. While the head of investment, at a global reinsurer noted, “we recognize that we are not going to achieve our goals without focusing our investment fund on strategic M&A opportunities, often taking minority stakes in new markets and segments to gain a foothold or a new capability.
All of the respondents to our survey said they plan to engage in at least one partnership or alliance agreement in 2017; one-in-five said they would enter into four or more over the year. Our research also indicated that many insurers are looking east for new partnership opportunities. As a director from one Japanese insurer noted, “the entry of more foreign firms into Asia-Pacific will push many domestic insurers to form new partnerships, in part to retain market position, but also to rebuild trust levels in their policyholders.”
China, however, already boasts a fairly mature partnership ecosystem, and as a result many of the partnerships now being forged in China will focus on alternative and aligned segments in the Fintech and e-commerce space.
Again, respondents were focused on securing partnerships and alliances that will help enhance and transform their business models, followed by those that will help transform their operating models – focusing on capability, new technology infrastructure and talent. Interestingly, only 11 percent of respondents reported being motivated by partnerships that respond to new innovations or industry trends.
According to our research, 94 percent of respondents are planning at least one divestiture in 2017. While those seeking to sell businesses report being largely motivated by the performance of the specific business unit. However, there are indications that some insurers are taking a more strategic view of their divestment decisions. Twenty-eight percent of respondents suggested they would make strategic changes in their portfolio to sell non-core assets and reposition their organization. Twenty-three percent also said they were looking to restock their treasury, either to pay down debt or to make new acquisitions. Interestingly, only twelve percent intend to undertake opportunistic divestitures to take advantage of strong valuations.
As Ram Menon, Global Lead Partner, Insurance Deal Advisory with KPMG in the US noted, “the bottom line is that insurance executives and shareholders expect investments to deliver more than just size and scale. They also need to deliver on the longer-term strategy for the organization.”