Deloitte Report Foresees Increased Insurer Mergers This Year

NU Online News Service, June 22, 3:23 p.m. EDT

Mergers and acquisitions activity is expected to pick up in 2009 as financial institutions look for ways to divest their non-core insurance businesses in order to fund potential capital shortfalls, a consulting firm report says.

The Deloitte analysis, "The 2009 Insurance M&A Outlook: Opportunity in an Uncertain Environment," states that "strategic buyers seeking to expand their markets and geographical reach in today's insurance M&A arena appear to be focusing on growth, distribution and scale. They may be keeping a close eye on large financial institutions seeking to divest their insurance operations."

In 2008, a number of conditions--including catastrophe losses, the financial crisis, lower investment returns and ratings downgrades--created a "perfect storm" within the insurance M&A arena, according to the report.

Now, with financial institutions looking to divest non-core insurance operations, there is growing activity in potential sell-side insurance M&A, states the report.

Buy-side activity is weak, notes the report, reflecting a scarcity of potential buyers. "Many potential strategic buyers on the buy-side are likely preoccupied with their own problems," according to the report. "What's more, many private equity firms that had been major players in insurance M&A in the past are now on the sidelines."

But the continuing soft market cycle could increase insurer buy-side M&A activity, the report suggests, since insurers are struggling to achieve organic premium growth and may look to grow through acquisitions.

The report also states that buying momentum is shifting now from private equity firms to "strategic buyers whose core business is insurance."

As for potential buyers, the report notes that many insurers may not have sufficient cash to fund acquisition activity. "In such an uncertain M&A environment, the most likely acquirers, other than Chinese or Japanese companies flush with foreign currency, may well be those Bermuda and European insurers that have avoided major investment losses," the study finds.

Dave Simmons, Deloitte's insurance mergers and acquisition leader, said, "Sovereign wealth funds may also seek to invest in insurance companies as Middle Eastern and Asian governments strive to increase the sophistication of their financial sectors by gaining access to needed resources and skills. As financial and credit markets stabilize, we expect strategic buyers to re-enter the market, take advantage of the supply-demand imbalance and a new wave of consolidation to occur."