There were 350 completed M&A deals in the global insurance sector in 2017, down from 387 the previous year. However, the second half of the year showed an uptick in deals for the first time since 2015, according to Clyde & Co’s latest annual insurance growth report, “Unlocking opportunity in a disrupted world”.
After a lacklustre couple of years for transactions, this rise in activity indicates a renewed level of confidence in deal-making as a tried-and-tested route to growth, said Mr Andrew Holderness, Clyde & Co, Global Head of Corporate Insurance.
He said: “Following on from the uptick at the end of last year, deal making has already got off to a quick start in 2018, with a number of high-profile deals announced, including those involving AIG/Validus and Axa/XL Group.”
Clyde & Co expects this momentum to continue with M&A returning to form as insurance businesses seek to build scale and geographic reach, generate efficiencies and deploy innovative technologies to access new customers with new products through new channels.
America regains top spot
The Americas, specifically the US, led the way as the most active region for insurance M&A transactions in 2017, increasing from 80 deals in 1H to 96 in 2H. In addition, 45% of the top 20 largest deals involved US acquirers in 2017. This uptick coincided with growing economic strength and corporate confidence. Recent tax changes have the potential to generate a spate of deals involving both US targets and acquirers.
Bermudian assets are also proving attractive with two of 2017’s five largest transactions involving Bermudian targets: Endurance’s acquisition by Sompo for US$6.3 billion and Ironshore’s acquisition by Liberty Mutual for $2.9 billion.
The report anticipates Japanese acquirers will continue to focus on overseas targets in 2018, while Southeast Asia remains on the radar for foreign investors.
The Brexit effect
European deal numbers fell 22% y-o-y to 118 in 2017. With insurance businesses focused on Brexit preparations, setting up subsidiaries and branches to ensure that they can continue to operate across Europe, transactions have slipped down the agenda.
At the same time, insurers outside Europe looking at potential acquisition targets have been putting activity on hold until the situation becomes clearer.
As Brexit preparations are completed, an increase in deals is expected, Clyde & Co said. In the meantime, this may have a positive impact on M&A activity elsewhere in the world such as in Asia, where there is not the same degree of market uncertainty and deals may be perceived as easier to get over the line.
China slows Asian numbers
The volume of completed deals in Asia fell from 72 in 2016 to 42 in 2017, principally due to foreign currency restrictions and regulatory uncertainty in China. The Chinese government’s plans to reduce investment limits for foreign insurers remain on hold is generating further uncertainty in the market and hampering deals.
The report highlighted the potential for any lifting of China’s supposedly temporary foreign currency restrictions to trigger a release in pent-up demand for capital flows both in and out of the country. This, in turn, would lead to a flurry of deals in 2018.
Interest in India increased in 2017 following changes in statute and regulation that opened up the market to foreign entrants. Further legislative changes expected in April 2018 may accelerate the arrival of international players, the report said.
Technology take-over
Traditional insurers and reinsurers are looking to digital solutions to help them boost their top lines, develop new products, enhance their distribution strategies, win new customers or build customer loyalty and drive efficiencies.
Looking ahead, Clyde & Co’s report sees established technology companies such as Google and Amazon well-positioned to take advantage of the insurance market in 2018, building brand loyalty and relegating established insurance players to the role of “white label provider of licensed capacity”. M