Global insurance M&A activity grew in first half of 2018 – Clyde & Co

Merger and acquisition (M&A) activity in the global insurance industry rose in the first half of 2018, with all regions seeing growth with the exception of Europe, according to Clyde & Co’s Insurance Growth Report mid-year update. There were 186 completed deals worldwide, up from 180 in the second half of 2017.

The report says this was the second consecutive six-month period to see modest increases in the volume of transactions since the low point in the first half of 2017, which followed two years of steady decline.

The Americas saw 97 deals in the first half of 2018, compared to 90 in the preceding six months, with the strengthening economic outlook a key driver in the US, in addition to shifting reinsurance market fundamentals in Bermuda, the report explains. Asia-Pacific saw an increase in deals from 20 to 25 with Japanese acquirers accounting for the lion’s share, ahead of Australia and Taiwan.

The Middle East and Africa saw four deals in the first half of 2018, compared to three in the previous six months, while Europe was the only region to see a decline in M&A with 59 deals, down from 65 in the second half of 2017. Clyde & Co says the overhanging uncertainty around Brexit continues to act as a brake on activity.

Andrew Holderness, Clyde & Co global head of corporate insurance, said: “After a sustained period of sliding M&A volumes that bottomed out in the first half of 2017, the first green shoots of recovery that we saw at the turn of the year are now taking root. The characteristics of the operating environment have not changed – the market remains uber-competitive and generating growth a perennial challenge – so M&A can provide potential synergies on reducing the cost base, build scale and access new customers. Dealmakers are feeling renewed confidence, buoyed by strengthening economies in the US and Asia, greater regulatory certainty in China and the Middle East, and the need to pick up the pace in Europe as the risk of a chaotic Brexit looms large.”

The report explains that there had been an increase in M&A activity in Europe in the second half of 2017, fuelling optimism that the Brexit lag effect was over, but deal volume dropped again in the first half of 2018. However, it adds that deals are still happening and Europe remains the second busiest region for M&A, behind the Americas.

“Brexit preparations have been absorbing huge chunks of management time, taking priority over M&A. Despite continuing uncertainty over the detailed mechanics of Brexit, most affected insurance businesses now have their operational plans in place and focus will return to the growth agenda. This means re/insurers within the EU and the UK will start looking for targets again while they themselves may be targeted by acquirers from outside the region,” said Mr Holderness.

Bermuda featured heavily in M&A deals in the first half of 2018, with a number of completed outbound deals involving Bermudan acquirers, as well as announcements of takeovers of Bermudan reinsurers such as AXA’s move on XL Catlin and AIG’s tie-up with Validus, with an expectation of more M&A to follow, according to Clyde & Co.

“There is a seismic shift underway in the reinsurance market. It is proving increasingly difficult to remain relevant as a large monoline reinsurer and as a result Bermudan businesses continue to be put up for sale or look to diversify by acquiring new underwriting assets themselves. In jurisdictions around the world large reinsurers are striving to get closer to their customers by increasing their footprint in the primary market, either organically or through acquisition. Carriers are looking to write risks at every level, be it from the direct side, reinsurance or retro¬cession and for that they need sufficient scale and balance sheet strength,” said Mr Holderness.

The report notes that the forecast for M&A is brighter than it has been for some time and, in addition to further deals in Bermuda and Europe, activity is expected to pick up in China, the US and the Middle East.

Vikram Sidhu, Clyde & Co corporate insurance partner in New York, commented: “The same factors that have kept M&A moving along at a rapid pace in the US for the past year – strong economic growth and lower federal corporate tax rates as well as negative factors such as relentless competition and pricing pressure – should sustain deal activity in the coming six to 12 months.”

Clyde & Co expects a significant increase in M&A activity in China, where deals have effectively been on hold for the past two years due to an ongoing period of regulatory uncertainty. “However, since February of this year the newly structured financial services’ regulator has issued a slew of new regulations that provide much greater clarity on the way forward,” said Michael Cripps, a consultant to Clyde & Co Westlink JLV. “As a result, we expect a steady stream of both domestic and international transactions that have been queued for the last couple of years coming to market.”

The report points out that a number of deals in 2018 have involved insurtech targets, adding: “Interest in technology as a growth driver has further accelerated, a trend that is set to continue with technology companies being targeted and looking to acquire insurance assets themselves.”

It continues: “New market entrants such as Amazon and Google are looking to challenge established models and heap further pressure on traditional insurers. In one recent example, Chinese online retail giant JD.com announced that it had received approval to take a 30% stake in Allianz China, to become its second largest shareholder.”