Insurers Using M&A to Circumvent Growth Obstacles
Insurance industry executives claim they are keen to embark upon mergers and acquisitions to help them deal with the challenges facing the industry, according to a new report from accountancy giants KPMG.
The survey was carried out in July 2011 and questioned 100 senior insurance executives working in US firms worth between $10 million and $1 billion. Some 63 per cent of respondents said their firms were looking to be involved with M&A deals within the coming two years, with 54 per cent saying they intend to make purchases.
Some 70 per cent said their companies were cash-rich and a third of these said the priority for spending their cash was to make a purchase that will strategically benefit the business.
So why are insurers so intent on buying and selling at the moment? The majority said that pricing pressures are affecting the industry and preventing them from growing organically. Legislative and regulatory pressures were also cited by a large percentage of insurance executives as an obstacle stopping them from expanding.
As a result of these challenges, insurers are considering mergers and acquisitions to pick up other products and grow through creating synergies. KPMG’s insurance practice national leader, Laura Hay, said, "The tough pricing and regulatory environment has insurers scrambling to determine the way forward, recognizing that maintaining the status quo isn't an option.
"What we'll see are firms focusing on their core strengths, divesting of certain assets or markets that don't fit those strengths and more aggressive M&A strategies,” she added.
Indeed, the KPMG survey found that almost half of those questioned said that accessing new markets was the driving force behind their appetite for M&As. Over a third added that M&A activity will also help them to respond to regulatory changes and develop new product synergies.
The boom in M&A activity may be seen sooner than expected as the firms with more money to spend are eager to start expanding through acquisitions. Ms Hay explained, "With organic growth hard to come by, these executives have stockpiled available capital and two-thirds of them tell us they are already putting it to work or plan to do so by the first quarter of 2012."
Although positive about the future in terms of mergers and acquisitions activity, this is not echoed in their views about the general economic outlook over the long term. Many of them realize that making the right strategic decisions at this stage will be crucial to their chances of developing sustainable growth.
Only 15 per cent of the executives said they expected the economy to have fully recovered by this time next year, with the vast majority expecting recovery to come at the end of 2013, 2014 or later. The short-term outlook was more positive, with half the executives stating that their revenues are higher than this time last year and two thirds expecting their revenues to grow further by summer 2012.
Overall, the outlook for the insurance industry seems to be positive, with many businesses focused on growth through M&A and 44 per cent looking to hire new staff in the coming months. However, with economic stability remaining elusive, it is vital that insurance firms ensure any acquisitions fit with their strategies for growth and avoid knee-jerk decisions.
