Deloitte: Insurance Industry Primed for M&A Activity

• The stock market is doing well overall, generating confidence.

• As the economy improves, there will be more demand for insurance products, helping to perk-up insurer's interest in M&A activity.

• Regulatory changes in Europe and the U.S. could force some carriers to exit businesses considered unattractive due to increased capital requirements.

A sign the insurance industry is aiming to reinvigorate its acquisition activity, says Director, Insurance M&A Leader for Deloitte, Dave Simmons, is that many companies that cut back on their acquisition departments during the financial crisis are now rebuilding them.

Deloitte says more companies are engaged in the preliminary stages of acquisition activity, developing playbooks and targeting candidates. However, many appear to be waiting for market disruption to trigger the next move.

An agreement by Congress to avoid the ramifications of the fiscal cliff, coupled with continued improvements in the U.S. economy, may act as one trigger for M&A activity. Should a few companies make a move, others may follow for fear of missing an opportunity.

"As a result, the industry could see activity of significance that it hasn't for the past several years," says the report.

Adds Simmons, "I'm expecting slow and steady increase in insurance M&A activity throughout 2013, but without an event that would accelerate that activity, I expect slow improvement."

Of the four industry segments the report briefly reviews, it dubs insurance brokers "the industry bright spot." Large firms continued to make acquisitions in recent years and pipelines "remain robust."

On the other hand, life and health insurers' M&A activity was lackluster. Low interest rates have insurers scrambling to exit the annuity business while opportunistic buyers stand ready to buy blocks of the business. This year, Deloitte expects many of these carriers to evaluate their businesses and decide to either stay-in or spin-off non-core or underperforming pieces.

P&C companies slowed down their M&A activity in no small part due to Superstorm Sandy. In 2013, some of these carriers may aim to improve earnings by acquiring specialty lines with better value, or reaching out to faster-growing markets outside of the U.S.

After two major transactions in the reinsurance marketplace M&A activity there dried up last year. Many reinsurance carriers are trading below book value, which makes it more difficult for buyers and sellers to come to terms. Revenue is not rising significantly within this sector as risk-transfer capacity remains plentiful with the use of alternative vehicles, such as side cars and catastrophe bonds. The low level of catastrophe activity is also hindering market firming.