Research

Hitting the right targets: How insurers are optimizing their capital strategies and what this means for the M&A market

November 14, 2017

Willis Towers Watson's latest report on M&A trends in the insurance sector identifies the capital optimization strategies that insurers are pursuing against the current challenging economic and political backdrop, and what this means for the M&A market. The report was carried out in conjunction with Mergermarket, the global proprietary M&A intelligence provider, who surveyed 200 senior-level executives in the insurance industry across Life, P&C and Reinsurance from the Americas, Asia and EMEA.

The insurance sector witnessed a marked drop in M&A deal value in 2016. However, looking ahead, we expect a healthy level of activity skewed towards the larger end of the market. Macroeconomic, demographic and regulatory pressures persist and this means that not only is a carefully planned M&A strategy more important than ever, so too are effective capital optimization strategies. With this in mind, we have identified the following themes from our survey results:

Alternative optimization

Over the next three years, more than three-quarters of insurers expect to increase their exposure to alternative assets as a means of optimizing their capital. The liquidity premium that alternatives offer is an opportunity for insurers to achieve the high returns that are lacking in more traditional investment markets. However, the illiquidity of these assets means that firms will have to carefully manage their portfolios in order to match their liabilities with more liquid assets they can trade to meet claims.

Competition concerns

Insurers say that their top concern is competition within the sector. While incumbents have been comparatively slow to adopt technology, insurtechs (fintechs that target the insurance sector), are shaking up the industry. Their low-cost, data-rich business models are effectively targeting niche product lines. Alternative capital vehicles that securitize policies are also common. This has created a soft market that benefits consumers, giving them more options at lower prices.

Fewer, larger deals

Our survey shows a dip in the number of firms that anticipate doing a deal in future against those that have done a deal in the past three years. This suggests a focus on larger deals in 2017. Firms may not be as acquisitive as they were, but we expect to see a robust pipeline that is biased towards larger transactions and megadeals.

Serial acquirers on the hunt

Despite this modest decline in M&A, serial acquirers are committed to dealmaking and aim to continue their pace of activity. With organic growth all but absent and technology disrupting the entire financial services sector, M&A will be the key to expansion. Developing internal capabilities and external networks to sustain a successful M&A strategy have never been more important.

The call of emerging markets

There is a modest increase in the number of insurers that expect to do deals in emerging markets in the next six years compared with the next three years. A growing emphasis on these markets is to be expected given the low growth and interest rates seen in the US and Europe. The under-invested emerging Asia region is seen as the most attractive region for future deals.

The full report is available via the Download link.