NU Online News Service, April 26, 3:52 p.m. EDT

Conditions are right for increased merger and acquisition activity by insurers, but firms should remember 2008 and 2009 lessons concerning awareness of subsidiary activities and emphasis on risk management, a Deloitte LLP report said.

The study, titled "Forward Focus," said in 2009 merger activity was down significantly compared to prior years. While companies were available for sale, notes the report, uncertain economic and regulatory environments, in addition to the lack of credit to finance transactions, stymied acquisition activity.

"Looking ahead in 2010," the report continued, "Deloitte's insurance M&A team is optimistic as signs of recovery unfold."

Credit conditions are improving, equity markets are rising, interest rates are low, and a growing number of companies have significant cash positions, Deloitte said.

"Meanwhile, insurance companies are looking for ways to grow premium in the current soft market, and there is ample room for consolidation--all favorable signs for an upturn," according to the report.

But the report advises insurers to heed some lessons learned from the last two years. Carriers "need to place greater emphasis on risk management during the evaluation state of a merger or takeover," the company advised.

An acquirer should look at the target's risk governance and risk reporting programs, as well as consider whether the transaction itself will cause new risks. The report recommended the acquirer include its chief risk officer in evaluating a target.

"When considering risk management due diligence, many factors come into play, but they all boil down to one concept: common sense," according to the report.

Deloitte also recommended understanding the risk profile of acquired subsidiaries and integrating the subsidiaries quickly into the corporate culture of the acquirer. The report noted that many subsidiaries--acquired during the peak of the M&A market--engaged in activities not known or understood by the parent companies.

Insurers should also consider the evolving regulatory environment when looking at M&A, the report said.

Noting that regulatory changes are likely for insurance companies and other financial institutions, the report said, "From a pure insurance M&A perspective, insurers considering and evaluating potential M&A transactions should be examining these potential M&A transactions from a risk and operational perspective as they continue to stay tuned to the evolving regulatory reform debate."

Potential international regulatory changes should also be on insurers' radars, Deloitte said, particularly any impact from the International Financial Reporting Standards (IFRS) on M&A activities.

The report noted that a proposed Securities and Exchange Commission plan would delay any significant U.S. action toward IFRS until 2015. But the report also said that more than 110 countries have so far adopted or announced intentions to adopt IFRS.

"From an M&A perspective, in 2010 and beyond, we believe that IFRS will continue to have an impact on M&A activities--some positive, and some not so positive," the report said.

Aside from regulatory changes, the report advised insurers to keep on top of potential tax law changes that could impact M&A. Changes in the taxation of insurance companies and products, the report stated, may impact deal strategy and value.

Special Reports /

Insurers Doing 2010 M&A Should Heed Past Lessons, Says Deloitte

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