Asia-Pacific re/insurance M&A picks up in first half of 2020

Merger and acquisition (M&A) activity in the Asia-Pacific re/insurance market made steady gains in the first six months of this year, with an increase from 31 for the same period last year to 38 deals in the first six months of the year, according to a new report from leading international insurance law firm Clyde & Co.

Japanese acquirors once again led the way, ahead of Taiwan and South Korea. The Clyde Asian team, however, expects re/insurance M&A activity to pick up in China in the second half on the back of new regulations and potentially easier access to the Hong Kong and Greater Bay Area.

“In the short to medium term, re/insurers in some markets in Asia-Pacific are under pressure and still working out the impact of Covid-19 on their operations. As margins become further squeezed, they will be re-evaluating their strategies and looking to redeploy resources to where they will be most profitable, which may lead to exits from certain jurisdictions or lines of business,” commented Clyde & Co’s Joyce Chan, a partner based in Hong Kong.

“Further out, we expect an increase in activity in China, where new regulations to facilitate consolidation and inbound investment are in place but yet to be tested, while the possibility of a link between the Greater Bay Area and Hong Kong could offer an alternative route into China for foreign investors,” she added.

On a global basis, insurance industry M&A activity also rose in the first half of 2020, with 201 completed deals worldwide, up from 197 in the second half of 2019, according to the law firm’s Insurance Growth Report mid-year update. This was only the second six-month period in the last five years during which the volume of transactions exceeded 200.

Most of the deals were hatched, however, during the pre-pandemic era and the uncertainty brought by the Covid-19 virus will inevitably lead to a slowdown in activity in the second half of this year and hopefully a revival in 2021 when the recovery presumably kicks in.

Ivor Edwards, partner and European head of the corporate insurance group at Clyde & Co, commented: “The deals completed in the first half of 2020 would have been negotiated and agreed back in 2019, pre-pandemic. The impact of Covid-19 on insurance M&A will only become clear in the coming months and we expect it to be stark in the short-term.”

Mr Edwards added: “For many, responding to the pandemic has meant putting growth ambitions to one side, in order to take stake stock of the impact on operations, claims and investment returns. The last few months have been plagued by a level of uncertainty – the enemy of dealmaking – rarely seen before. This will be reflected in the number of completed deals in the second half of the year. But as the economy moves towards a state of stability that could be defined as ‘the new normal’, opportunities will arise and we expect re/insurance transactions to make a comeback in 2021.”

Clyde & Co notes that the first half of this year saw a slowdown in megadeals, with just six valued at more than $1bn, compared to 20 in the whole of 2019. This was evidence of a “more measured” approach to dealmaking that the law firm expects to continue.

Vikram Sidhu, a Clyde & Co Partner in New York, commented: “Strategic and financial buyers had already begun to place heightened focus on deals that really make sense for them, which is a trend that will accelerate in the fallout from Covid-19. As the pandemic continues, we will see a range of distressed businesses as well as re/insurers pulling out of certain lines, industries or geographies. Those looking to rationalise their operations will move to divest divisions and books of businesses that do not fit with their core strategy or their financial goals. In 2021, we expect an increase in the number of such businesses being offered for sale and a greater interest in legacy business that could lead to a burst of deal activity.”

Technology continues to be a primary growth driver worldwide, according to the Clyde & Co analysis. Deals completed in the first half of this year included investments into US-based startup Openly, Belgium’s Keypoint and yallacompare in the United Arab Emirates.

Ms Chan commented: “While insurtech investment dived in Q1 due to Covid-19, it rebounded in the second quarter. Although investors have already become more selective since last year, a trend that the pandemic will strengthen, high-quality tech offerings are still attractive, provided they can prove their worth. Startups now reaching maturity with a proven track record are ripe for acquisition and we expect this to be a key deal driver in H1 2021.”

As with most past major catastrophes, Covid-19 has triggered a further hardening in the primary and reinsurance market and attracted fresh capital, enabling the creation of some major new startups such as specialty re/insurer Convex led by Stephen Catlin and broker McGill & Partners led by Steve McGill. This could depress M&A activity, according to Clyde & Co.

“Covid-19 has accelerated the market hardening that was already underway and re/insurers are keen to write more risk at a higher price but need to offset losses from Covid-19 in order to do so,” said Mr Edwards.

“As rates rise, there is also the potential for a wave of new startups and scale-ups, as we have seen in the aftermath of other major loss events in the past, albeit the situation now is more nuanced than post-Hurricane Katrina, for example. That has not deterred a range of market figures from exploring options and there has been a succession of headlines around early-stage startup plans,” he added.