Vast majority of insurance companies surveyed globally are planning M&A activity in 2017, with most driven by need to transform business and operating models.
Expect 2017 to be a year of deal making in the insurance industry, according to a new report released today by KPMG International, with 84 percent of insurance companies surveyed planning to make between one and three acquisitions in 2017, while 94 percent plan at least one divestiture. Two-thirds of insurers said they expect to undertake a cross-border acquisition this year.
According to the report, The new deal: Driving insurance transformation with strategy-aligned M&A, 33 percent of insurers say transforming their business model will be the primary driver of acquisitions in 2017, with an equal percentage citing enhancing their existing operating model and transforming their operating model as the motivators for deal activity.
“Insurers are clearly hungry for good M&A opportunities,” said Ram Menon, Global Lead Partner, Insurance Deal Advisory with KPMG in the US. “They are focused on transforming their business and operating models, and even with geopolitical uncertainties, they are aggressively looking at deals that can help meet their objectives.”
Partnerships are also viewed as critical for operational transformation, with 87 percent of insurers indicating they will partner for new operating capabilities, while 76 percent say they will partner to access new technology infrastructure.
Based on a survey of 200 global insurance decision-makers conducted by Mergermarket on behalf of KPMG International earlier this year, the US is identified as the top national destination for acquisitions, followed by China. But regionally, Asia Pacific dominates, with 47 percent looking at the region for acquisitions, more than twice the percentage for North America. Western Europe is seen as presenting the most divestiture opportunity.
Despite the strategic need for business transformation, the report finds that many insurers continue to take an opportunistic approach to M&A. Just 47 percent of those insurers with dedicated M&A teams say their deal identification objectives are aligned to their corporate strategy. Thirty-seven percent admit their approach to deal making is still largely reactive.
“If you are using M&A to effectively transform your business, you can’t just jump at opportunistic deals, you need to be much more strategic,” noted Ram Menon. “Insurance organizations need to make investments that deliver on the longer-term strategy for the organization. And that is where the big challenges will lie.”
The report suggests that insurers are taking a number of paths to secure transformative deals. Corporate venture capital (VC), in particular, is gaining traction with 62 percent of insurers saying they are either already active or currently setting up a corporate venture capability as a way to build technical capabilities. More than a quarter of the existing VC funds claim more than US$1 billion in allocated funding.
“In this environment, the key to M&A success is to align financial, business and operating models so that you can achieve clarity about the markets and geographies you wish to play in and how you will win,” noted Matthew Smith, Global Strategy Group, Insurance Sector Lead, KPMG in the UK. “You must also be prepared to analyze your capabilities in the areas of due diligence and targeting in order to understand how to extract maximum value over the medium term and how the target’s capabilities complement your own.”
In Q4 2016, KPMG commissioned a survey of 200 global insurance executives to learn about their opinions and plans regarding M&A, corporate strategy, and innovation over the coming 12 months. The survey respondents were divided regionally among firms in Asia-Pacific (33%), Europe, Middle East + Africa (33%), and North America (33%) as well as by the segments Life (25%), Non-Life (25%), Reinsurance (25%), and Other (25%). (The segment ‘Other’ encompasses Insurance Brokers and Insurance Services.) Companies needed to have a minimum of US $1.5bn in annual revenue to qualify for participation.
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