Auditing firm PwC says the first half of this year saw a measured uptick in dealmaking across the insurance industry, both globally and in South Africa

However, despite the emergence of a turning rate cycle, macroeconomic weakness and political uncertainty for those still facing uncertain election outcomes, along with unresolved global tensions, continue to present challenges for investment and mergers and acquisitions (M&A) activity, the firm says.

“While turbulence and uncertainty are often not ideal, in this scenario, it helps to reinforce the requirement and opportunity for many industries and operators to adapt to better respond to these challenges,” PwC notes, pointing out that this can be done through continued strategic agility, operational enhancements and M&A activity.

“The insurance industry is one such industry where we have seen organisations rapidly adapt to meet changing customer needs whilst focusing on delivering growth and profitability.

“This speaks to the determination that organisations have to grow and diversify their operations in order to remain resilient and competitive, and drive investor returns,” PwC deals and corporate finance partner Morgan Jones adds.

He says the need to focus on growth and returns is continuing to trigger M&A activity across the industry, which is being spurred on by several key deal drivers relating to access, diversification, consolidation and innovation.

A key avenue for growth in the insurance industry consists of access to the right distribution channels that are aligned to one’s strategic plans, PwC explains.

Distribution that focuses on new channels for customer acquisition and customer engagement can fast-track relevancy and reach in markets, adding scale and new growth opportunities supported by seamless omnichannel engagement.

Further, increasing competition in insurers' traditional segments is enhancing the need for diversification in pursuit of new areas of growth.

“Addressing new customer segments and expanding product sets can deliver greater growth, as well as the ability to achieve scale and reach in these areas, which can be fast-tracked through M&A,” PwC says.

The firm points out that, in a lower-growth environment, where cost management and return on investment remain key, acquisitions for consolidation and economies of scale are an obvious opportunity for insurers to enhance top- and bottom-line performance.

While the concept of acquiring goodwill remains challenging, the ability to extract synergies and drive value from such transactions can deliver material benefits if properly considered and executed, PwC points out.

“Insurance, like many other areas of financial services, has seen its fair share of new entrants and disruption. Yet the core proposition of insurers – customer reach, value, relevancy and experience, combined with fit-for-purpose products – remains,” Jones says.

PwC says it is also observing the “insure-tech” landscape maturing and valuations stabilising, especially given the capital exit being experienced by the sector. This means that operators are well positioned to consider whether M&A in this area can support operational and product technology enhancements.

“While the above-mentioned trends continue to drive dealmaking activity within the insurance sector, it has never been more important to underpin M&A with a clear set of principles and an in-depth assessment of strategy, targets and deal execution capabilities,” PwC South Africa corporate finance and M&A partner Jennifer Chetty-Feinberg says.

PwC points out that there are several fundamentals that guide this process. These include defining one’s strategy and developing a deep understanding of it, preparing for effective diligence by understanding one’s internal capabilities, and establishing a value creation plan bridging pre- and post-deal positions to gain a better understanding of the value drivers within the business that can be developed.

New approaches to diligence in the sector can be combined with clarity on investment rationale and deal-making considerations to deliver greater confidence in structuring and deal pricing.

“Insurance remains a vibrant industry, demonstrating growth and innovation across the value chain—whether in the face of, or driven by, an ever-evolving regulatory, accounting and operational backdrop.

“While organic strategies for value creation remain critical, the industry consistently demonstrates the opportunity that well-considered and executed M&A can deliver to operators,” PwC Africa insurance leader Alsue du Preez says.