Insurance sector M&A activity to hit new heights in 2017

To go or grow?

That is the question insurance companies are asking themselves in 2017.

The volatility caused by Brexit and the U.S. presidential election forced most companies to the sidelines in 2016. But after a year to catch their breath, mergers and acquisitions are the buzz of 2017.

"Insurers took 2016 to understand how major events will influence the business and investment climate around the world," says Ram Menon, Global Lead Partner, Insurance Deal Advisory with KPMG in the U.S.

"And while there are still many unknowns, we expect insurers to return to the market and start to take advantage of the new realities that have been created as we move into the second half of 2017."

According to a new study by KPMG International, 84 percent of insurance companies plan to make between one and three acquisitions in 2017, while 94 percent plan at least one divestiture.

KPMG's study, The new deal: Driving insurance transformation with strategy-aligned M&A, delivered its findings based on a survey of 200 global insurance decision-makers. The U.S. remains the top national market where insurers expect the most deal activity. Almost a quarter ranked the U.S. as their top national destination, versus 12 percent who said they were focused on Greater China, the second top national target market.

"Insurers are clearly hungry for good M&A opportunities," says Menon. "They are focused on transforming their business and operating models, and even with geopolitical uncertainties, they are aggressively looking at deals that can help meet their objectives."

Already this year, the industry witnessed insurance carrier Nationwide expanding its reach with the acquisition of Jefferson National, a distributor of investment products that counts some 4,000 advisors and $4.7 billion in client assets.

As Kirt Walker, Nationwide Financial president and chief operating officer, said at the time of the deal, "This partnership allows for growth in ways that our companies couldn't have achieved individually and complements our strong brokerage distribution channel."

Go or grow

The KPMG study revealed an appetite for big deals is potentially speeding up consolidation within the industry. "Sixty-six percent of sellers are hoping to divest businesses valued at between $250 million and $1 billion while 70 percent of potential buyers are hoping to buy businesses of that size."

Mergers and Acquisitions

Big deals are on the rise in 2017 for insurance sector mergers & acquisitions. (Thinkstock)

These bigger deals are forcing many insurance companies to make a big decision.

"If you exclude the big elephants, all the other players in the single markets are rethinking or reviewing their strategies," says Giuseppe Latorre, Partner with KPMG in Italy. "Many are deciding that they must either grow or exit the market."

Companies are exploring a variety of avenues to secure financing. Already this year, insurers (62 percent) are actively exploring or setting up VC funding for deals.

"In this environment, the key to M&A success is to align financial, business and operating models so that you can achieve clarity about the markets and geographies you wish to play in and how you will win," says Matthew Smith, Global Strategy Group, Insurance Sector Lead, KPMG in the UK. "You must also be prepared to analyze your capabilities in the areas of due diligence and targeting in order to understand how to extract maximum value over the medium term and how the target's capabilities complement your own."

Looking to the future

An eye on the future is also a deal driver, according to Chris Wei, Global Chairman of Aviva Digital and Executive Chairman of Aviva Asia.

"Our stance is changing dramatically," Wei says. "For one, the traditional bank/insurance relationship has been fundamentally de-emphasized. What we are looking for today are relationships that go beyond simply leveraging bank networks to also help drive our vision around digital execution for financial services. I don't think the traditional big M&A distribution deals are going to drive our success in the future, but rather smart investments and partnerships that deliver brilliant customer experiences."

KPMG's Menon believes that companies need to pump the brakes if they're looking to acquire for the sake of acquiring.

"If you are using M&A to effectively transform your business, you can't just jump at opportunistic deals, you need to be much more strategic," says Menon. "Insurance organizations need to make investments that deliver on the longer-term strategy for the organization. And that is where the big challenges will lie."

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