Insurance equity analysts expect a significant increase in mergers and acquisitions among U.S. property-casualty insurers this year, but most do not see M&A activity as the best use of capital or the most effective way to bolster an insurer's ratings, a consulting firm's global poll has revealed.
As an alternative to M&As, respondents indicated a preference for share buybacks and dividend increases, according to the telephone survey of 108 analysts conducted for Accenture by the Institutional Investor Market Research Group.
Seventy-one percent of all p-c analysts surveyed said they anticipate a "significant increase" in M&A activity in 2008. But the study found significant differences by geography, with p-c analysts in North America three times as likely as those in Europe to predict a significant increase in such activity.
"The logic of consolidation within the property and casualty industry, particularly in North America, may be gaining favor as the economy slows and as rates soften," said John Del Santo, managing director of Accenture's Insurance practice in North America.
"However, our research suggests that analysts might not fully value these transactions without a clear linkage to organic growth or until efficiencies are realized," he added.
Globally, p-c analysts attached modest importance to M&As in terms of earning superior ratings, but they widely favored organic growth.
Indeed, fewer than half–45 percent–ranked M&A among the most valuable uses of capital. Sixty-seven percent said M&A activity within mature markets is important or critical to earning superior ratings over the next three years, compared with 84 percent who said the same of organic growth.
One-third described M&A activity within mature markets as "unimportant" to earning superior ratings over the next three years, compared with 16 percent who said the same of organic growth.
Seventy-seven percent rate operational efficiency improvement–or "transformation" programs–as the most valuable use of capital after share buybacks and dividend increases, cited by 83 percent of respondents.
"M&A winners will focus on rigorous deal discipline and early post-merger integration planning in order to quickly realize synergies and demonstrate a path to profits," said Mr. Del Santo.
Among the survey's other key findings:
o Despite two years of relatively mild weather and natural events, 89 percent of those surveyed said climate change and natural disasters are the top challenges facing p-c insurers.
o Ranked second, with 85 percent, was modernization of company information technology systems, with IT for underwriting the most important area cited for p-c tech investment. Mr. Del Santo said it will be interesting to see if analysts in the future "really push companies on their IT strategy."
One item that has become big budget for p-c companies, which did not register in the survey, was advertising, according to Mr. Del Santo. "It didn't pop up. I don't know if that is being rewarded," he said.
"Research suggests that analysts overall are looking to reward carriers with bold visions for the longer-term opportunities in emerging markets," said Serge Callet, managing director of Accenture's insurance practice.
Mr. Callet said "winners" among insurers "will be those who have flexible, scalable and efficient operations and can strike the best partnerships and joint ventures around the globe."
Operational efficiency improvement–or "transformation"–programs were ranked only slightly behind share buybacks and dividend increases among the most important uses of capital but were significantly ahead of product and service innovations, M&A and business-line expansion, the poll found.
"One of the most remarkable findings of our research is that such a vast majority of analysts hold such bullish views on longer-term transformation programs and see an opportunity for insurers to outperform the market through increased efficiency," added Mr. Callet.
"Our recent analysis suggests that when it comes to return on equity, transformation programs can have an equal or greater positive effect than share buybacks can," he added.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.