Insurance equity analysts expect a significant increase in property/casualty mergers and acquisitions this year, according to findings of a global survey by Accenture.

Conducted by Institutional Investor Market Research Group as part of Accenture’s High Performance Business research, the survey queried more than 100 leading insurance equity analysts in 14 of the world’s largest insurance markets and covered a diverse range of topics, including profit and growth strategies, capital utilization priorities, critical industry challenges, operational excellence, and industry top performers.

Among the survey’s other key findings: More than three-quarters (77 percent) of analysts rate operational efficiency improvement – or “transformation” – programs as the most valuable use of capital after share buybacks and dividend increases (cited by 83 percent of respondents). Eighty-nine percent of property/casualty analysts cited climate change and environmental issues among the industry’s top three challenges, making it the most widely cited property/casualty industry challenge in the survey.

“The determinants of success within the $3.7 trillion insurance industry are rapidly changing as new threats and opportunities emerge both regionally and globally,” said Serge Callet, managing director of Accenture’s Insurance practice. “We tapped the collective insights of these critical industry observers to deepen our understanding of how insurers can earn superior ratings and how they can achieve high performance in a challenging market environment.”

Property/casualty analysts predict M&A but favor organic growth

More than two-thirds (71 percent) of all property/casualty analysts surveyed said they anticipate a “significant increase” in merger and acquisition (M&A) activity in 2008. At the same, the findings indicate significant differences by geography, with property/casualty analysts in North America three times as likely as those in Europe to predict a significant increase in M&A activity.

“The logic of consolidation within the property/casualty industry, particularly in North America, may be gaining favor as the economy slows and as rates soften,” said John Del Santo, managing director of Accenture’s Insurance practice in North America. “However, our research suggests that analysts might not fully value these transactions without a clear linkage to organic growth or until efficiencies are realized.”

Property/casualty analysts globally attached modest importance to M&A in terms of earning superior ratings, but they widely favored organic growth:

• Less than half (45 percent) ranked M&A among the most valuable uses of capital;
• Two-thirds (67 percent) said that M&A within mature markets is important or critical to earning superior ratings over the next three years, compared with 84 percent who said the same of organic growth; and
• One-third (33 percent) described M&A within mature markets as “unimportant” to earning superior ratings over the next three years, compared with 16 percent who said the same of organic growth.

“M&A winners will focus on rigorous deal discipline and early post-merger integration planning in order to quickly realize synergies and demonstrate a path to profits,” DelSanto added.

Analysts strongly favor operational efficiency programs

Operational efficiency improvement – or “transformation” – programs were ranked only slightly behind share buybacks and dividend increases among the most important uses of capital. But it was significantly ahead of product and service innovations, M&A, and business line expansion.

“One of the most remarkable findings of our research is that such a vast majority of analysts hold such bullish views on longer-term transformation programs and see an opportunity for insurers to outperform the market through increased efficiency,” said Callet. “Our recent analysis suggests that when it comes to return on equity, transformation programs can have an equal or greater positive effect than share buybacks can.”

Further highlighting the analysts’ focus on efficiency, “aging systems and IT modernization” was the second most widely cited industry challenge among respondents.

Climate change cited as top property/casualty industry challenge

“Climate change and environmental issues” was the most widely cited industry challenge among property/casualty insurers – ahead of aging systems and IT modernization (85 percent), new regulations and reforms (76 percent), cross-border competition (69 percent), terrorism and geopolitical instability (61 percent), growing risk to investment portfolios (59 percent), changing customer demographics (58 percent), workforce demographic changes (52 percent), and competition from banks (35 percent) and capital market firms (27 percent).

Among the survey’s other findings:

• The majority (57 percent) of analysts said that IT investment in areas such as policy administration, claims management, process optimization, and call centers is “critical” to the insurance industry over the next three years, with another 34 percent describing such IT investment as “important.”
• Eighty-two percent of analysts said the insurance analyst community would benefit from more education on new technologies and its role in business performance.

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Source: Accenture

© Copyright 2007, National Association of Mutual Insurance Companies (NAMIC).