February 11, 2019

Global insurance M&A activity up 9% in a year but uncertainty to cause temporary slowdown

There were 382 completed mergers and acquisitions (M&A) worldwide in the insurance sector in 2018, up 9% (from 350) on the previous year.

With 196 deals in the second half of the year, following 186 in the first six months, there have now been three consecutive six-month periods of growth for the first time since 2009. This is according to Navigating a course between uncertainty and opportunity, the latest edition of global law firm Clyde & Co’s insurance growth report, released today.

While the Americas remained the most active region for M&A, with 189 deals in 2018, it saw a slight drop off in the second half of the year with 92 transactions, down from 97 in the first six months. Asia Pacific saw the biggest gains year-on-year with 59 deals, up from 42 in 2017, with M&A accelerating through the year. Europe was steady with 122 completed deals in 2018, up from 118 in the previous year. 

Andrew Holderness, Global Head of Clyde & Co's Corporate Insurance Group, says: “Transaction activity worldwide was buoyant in 2018. Against a backdrop of stiff competition on pricing, stock market volatility and persistently low interest rates, a merger or acquisition remains a key strategy to reach new customers and markets, and to drive down costs by delivering synergies. However, factors including Brexit, trade wars and protectionism are generating uncertainty, the enemy of deal-making. The slowdown in the Americas in the second half of last year is indicative of heightened investor caution and we predict 2019 will be a year of two halves – a slowdown in M&A in some markets in the first six months, while the second half should see a return to form.”

Widening pool of targets in scope

At the top end of the market the idea that size matters still holds. In 2018 there were 18 mega-deals valued in excess of USD 1 billion, including the year’s largest, AXA’s USD 15.1 billion acquisition of XL Catlin. In 2019, further consolidation is expected with a number of large businesses across the world actively on the acquisition trail.

New York based Clyde & Co corporate insurance Partner Vikram Sidhu, says: “Carriers are increasingly targeting the entire insurance value chain for opportunities. The spate of deals involving Bermudan targets has been driven by the realisation that being a stand-alone reinsurance company may no longer be viable and diversification and larger scale will be essential going forward.  And a growing acceptance that alternative capital is here to stay has seen some re/insurers move in on ILS targets, with Markel’s acquisition of Nephila being the largest. Overall, the continuing pricing and competitive pressures continue to provide an impetus to deal-making.”

Technology a primary deal driver

Technology cemented its position as a key driver of M&A in 2018, underpinning deals of every size. Examples of insurers taking stakes in insurtech start-ups increased across every geography. These included France’s CNP Assurances investing in mobile payment solutions company Lydia, Berkshire Hathaway buying a stake in One97 Communications, India's largest digital payments company, and HSB, part of Munich Re, acquiring US-based relayr, Inc., a global Industrial Internet of Things (IIoT) technology company. 

Hong Kong-based Clyde & Co corporate insurance Partner Joyce Chan, says: “Despite the risks of integrating legacy systems, a big-ticket M&A involving established market players remains hugely appealing because of the potential synergies, cost savings and streamlining of processes that the merger and the application of technological innovation can provide. Meanwhile, a transaction can be the easiest way to access innovation offered by dynamic start-ups. Some acquirors are looking at companies at a very early stage of development, while others prefer slightly more established targets with proven business models. Whichever part of the industry they are focused on, as re/insurers consider their growth strategies for the year ahead, technology remains an imperative.”

Regulation leading to consolidation

Regulators in a number of countries have been introducing legislative changes that are having an impact on M&A. Tighter capital requirements in markets across South East Asia, the Middle East and South Africa will lead to consolidation or players being forced out of the market.

Avryl Lattin, Clyde & Co Partner in Sydney, said: “The introduction of risk-based capital systems around the world is presenting deal-making opportunities that will ultimately result in a healthier industry, populated by fewer, stronger insurers. In Australia there is increasing pressure from shareholders for insurers to focus more on core activities. This has driven deals throughout South East Asia as companies move to divest regional assets."

Lull in M&A will pass as uncertainty clears

While we predict a slowdown in transactions in some markets in the first six months of 2019, this should only be a temporary lull as greater clarity emerges in Europe around the shape of Brexit and in the US around trade tensions with China.

Andrew Holderness said: “With clarity around Brexit finally likely, the changes that will follow will generate opportunities, especially in the run-off sector. Meanwhile, with no significant hardening of the market on the horizon, we expect the need to dispose of non-core assets will persist. The Lloyd’s market could provide rich pickings – with around 20 syndicates exiting different classes there is a substantial quantity of discontinued business which will either be closed naturally or sold to another syndicate, presenting the potential for billions of dollars’ worth of legacy deals.

Read the full report here.