Global insurers continue to warm up to mergers and acquisitions(M&A) as a significant component of their overall growthstrategies. That's what Towers Watson concluded afterpolling hundreds of senior insurance executives about their M&Aplans and proclivities in the next few years. Working inconjunction with Mergermarket, the global firm surveyed morethan 250 executives representing life, property & casualty(P&C) and composite insurers from around the world.

Of those surveyed, nearly three-quarters—or 73 percent—saidtheir companies were planning M&A transactions over the nextthree years. This compares to 44 percent who said theircompanies completed a transaction in the last three years.Similarly, more than three-quarters—or 77 percent—said they foreseean increase in insurance M&A in the next one to threeyears.

Last Year's Global M&A Deals

This outlook is borne out by recent trends, which have alreadyseen an uptick in insurance M&A activity, Towers Watson says.The value of global insurance M&A deals in 2012 was the secondhighest seen in the last eight years. In the first half of 2013,the value of deals completed was 44 percent higher than during thesame period last year.

Following the release of survey results, Jack Gibson, TowersWatson's global lead for insurance M&A, alluded to anumber of transformational deals in the U.S. life insurance sectorthat have happened in the recent past. Still other insurershave either “exited or entered the U.S. as a way to alter theirgeographic diversification,” he says.

Meanwhile, valuation gaps remain a central challenge to themarket, Towers Watson notes. Acquirers are seeking aglobal average of about 15-percent return on capital, ranging fromapproximately 14 percent for deals in western Europe andthe Americas, to roughly 17 percent in Africa and the MiddleEast.

Further pressure on valuations may come from the fact that onlya fifth of respondents said they plan to divest operations in thenext three years, compared to 34 percent that have completedone or more divestments in the past three years.

“If you combine fewer plans for companies to divest with anincreased appetite for acquisitions, we could see the possiblereemergence of a seller's market driving competition for assets,which would reduce target returns and raisevaluations,” Gibson adds.

Many companies display a regional “home bias” for where they arelikely to target their M&A activity, but there is universalagreement that the Asia Pacific region provides the most attractiveopportunities over the next three years, while North America ratedsecond least attractive. Despite the fact that western Europe wasrated at the bottom of the regional attractiveness league, TowersWatson notes that 55 percent of respondents said SolvencyII would promote acquisitions because of reasons, such asrestructuring and capturing diversification benefits.

“There should be cautious optimism surrounding the insurancesector and related M&A across North America,” Gibson concludes.“Deal making is being driven by consolidation as a response todepressed premiums and more stringent capital requirements. Thispush[es] firms to expand product areas in order to diversify riskand maximize return on capital.”

The principal drivers for M&A activity varyamong insurer type. For instance, p&cinsurers, composite and reinsurance firms aim to expandinto new territories and business segments to enable growth,whereas life insurance respondents rated general economies of scaleas the most important influence on deals.