Mergers and acquisitions will continue to be a primary source of growth in the insurance sector in 2015—building upon the momentum exhibited in 2013 and 2014, according to a new study from Deloitte.

Factors contributing to this increased M&A activity include strengthening macroeconomic conditions, including the possibility of a rising interest rate; continued organic growth challenges; historic levels of excess capital and pressure to put that capital to work as stock buybacks become a less-favored capital management vehicle; increased interest in insurance M&A from strategic, private equity and foreign buyers; and several large, late-2014 transactions that have increased M&A visibility among company boards and in the C-suite.

For example, Deloitte notes that in 2014, there were eight $1 billion or more deals that made up a small percentage of the 399 transactions involving brokers and underwriters. By comparison, only eight deals worth $1 billion or more were executed over the past several years.

The emergence of more foreign buyers, particularly from the Asia-Pacific region, which could provide these companies with a strong entrance into the U.S. market, was identified as the second significant dynamic by the report. Tokyo-based Dai-ichi Life Insurance Company Ltd. acquired Birmingham, Ala.-based Protective Life Corporation in a transaction worth $5.7 billion that created the 13th largest global insurer with total assets of $424 billion. Dai-ichi anticipates that this transaction will allow them the ideal platform for expansion into the U.S. market.

Third, the report noted consolidation in the industry, for example, Renaissance Re's purchase of Platinum Underwriters Holdings for about $1.9 billion or approximately $76 per share in stock and cash. According to Deloitte, "the consolidation of reinsurance and a diversification of these organizations into primary specialty insurance (with particular emphasis on obtaining access to the Lloyd's market) may be a sea-changing event for the industry."

Bar chart with arrow showing increase over time

P&C deals

On the property and casualty (P&C) front, transactions continued to trend upward, growing more than 60% compared to 2013, with five worth more than $500 million. Some of the billion-dollar transactions were in the P&C segment, including the purchase of the Warranty Group, a warranty insurance firm, by TPG Capital for approximately $1.5 billion. Warranty Group was owned by Onex Corporation, a Canadian private equity firm, which made a $498 million equity investment in the company in 2006. The transaction will significantly expand Warranty Group's resources both domestically and internationally.

In the life and health segment of the industry, M&A activity was described as "sluggish, reaching its lowest point in 12 years and seeing a 30% decrease over 2013. Consistently low interest rates could be adversely impacting this segment. According to the report, M&A in life and annuities has been slow because of a limited supply of available companies.

When it comes to volume, brokerage deals were extremely active with 321 announced deals, one of the most active years in the past decade. The Deloitte report says that "brokers with the broadest, deepest, most efficient platforms will continue to win, and effective M&A programs will be a central component of their success."

Row of black binders with 2015 in red selected

Outlook for 2015

The report also identified six issues that will impact insurance M&A activity in 2015:

  1. Strengthening macro conditions. This includes rising interest rates, stronger balance sheets and improved company earnings.
  2. Regulatory developments. An unsettled regulatory environment could be an impediment.
  3. Investment activity by private equity (PE) firms. There is more activity by PE firms, which could result in "an uptick in consolidated blocks of life insurance business" going to them.
  4. Capital management balancing act. Insurers are assessing how to best balance the interests of multiple stakeholders and M&A is becoming a leading option because rating agencies and regulators are unlikely to derail these deals.
  5. New entrants in the M&A arena. The new entrants are emerging from within the industry and adjacent industries.
  6. Heightened demand by foreign insurers to enter the U.S. market. Potential buyers are entering through acquisitions.

For 2015 Deloitte says there will continue to be activity in the M&A insurance market, but that buyers will be cautious. The link between business and M&A strategy also will become more apparent as buyers look for the right partners to move them to the next level. 

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