The M&A scene for insurance is set to remain vibrant for the next 12 months following a ‘solid’ first quarter of deal making in 2018, according to EY.
In a note to clients, EY global insurance transaction leader David Lambert said with the positive economic outlook in China, US and the Eurozone, businesses are optimistic the global economy will stay on an upward trajectory in the near future.
“In this context, all (100%) insurance executives surveyed see the global M&A market as either stable or improving in the next 12 months,” he said in reference to a recent survey by EY.
The survey also revealed that almost half (48%) of the insurance executives questioned said they would actively pursue acquisitions in the next 12 months – which is above the average since April 2013.
An eye on transformation
Mr Lambert noted that insurers will continue to undertake “transformational deals” and invest in InsurTech businesses as a way of accessing and operating in “emerging digital ecosystems”.
“We are seeing the creation of ever-more sophisticated insurance M&A markets in response to ongoing sector transformation: bigger pipelines, better targeting and divesting assets at risk of disruption will be critical components of successful business portfolio transformation,” he said.
Insurers in many markets are struggling with poor returns and high operating costs on existing products, combined with the need to reposition their capital towards innovative growth opportunities.
Thus, the transformation agenda and adoption of new technology offers insurers opportunities to achieve growth and obtain significant operating efficiencies. But companies are not necessarily diving headfirst into the latest technology.
“If structural reforms have taught the sector anything, it’s that re-examining the basics can bring significant benefits. For example, many are cutting costs through divestments of non-core middle- and back-office functions,” according to EY.
Given this context, more than half (61%) of those surveyed expect the number of technology-driven divestments to increase over the next 12 months, ahead of their peers both in banking and in wealth and asset management.
Competition for high-quality assets
Insurance executives expect increasing competition for assets – with 80% pointing toward private equity (PE) and other funds.
“We are seeing PE activity across many areas of insurance, including participating in the extensive consolidation and reshaping of distribution businesses,” said Mr Lambert.
Looking ahead, EY expects cross-border M&A activities to be a major theme in the next 12 months – with the top five investment destinations being the US, the UK, China, Brazil and France.
“We continue to see a clear outlook for insurance sector transformation and record levels of dry powder could also fuel increased activity in the broader insurance sector by PE acquirers,” he said. M