The volume of completed mergers and acquisitions (M&A) in the global insurance industry continued dropping during the first six months of 2017 to 170 deals, compared to 186 deals reported for the second half of 2016, according to Clyde & Co.’s mid-year M&A update.
Activity is now down 24 percent from a recent high point in H1 2015 when there were 225 deals, the report said, attributing the more cautious environment in part to increased regulation in China, political uncertainty as a result of Brexit in the UK and the ongoing political and economic uncertainties in Greece, Italy and Russia.
Diving into the regions, the report said that M&A activity was up in the Americas, Middle East & Africa and down in Europe and Asia.
The Americas completed 86 transactions during H1 2017, compared to 81 during last year’s second half. The Middle East and Africa also reported a slight increase at eight deals this year, compared to just two in H2 2016. On the other hand, European deals dropped 28 percent during the first half of 2017, which Clyde & Co. attributed in part to the distraction of Brexit.
Completed M&A deals in Asia Pacific fell to 22 during the first half from 36 in H2 2016, partly due to temporary monetary controls in place in China.
Addressing the M&A scene in the U.S., Vikram Sidhu, a Clyde & Co. partner based in New York, said U.S. deal activity in the second half of 2017 may not be as robust as the first half.
“The caution is driven by several factors, including lesser clarity about what President Trump’s administration and the Republican Congress might be able to achieve with respect to issues such as tax reform as well as global uncertainty on issues ranging from the effects of Brexit to North Korea,” noted Sidhu, who specializes in insurance transactional and regulatory matters.
“In Europe, uncertainty persists with Brexit acting as a significant brake on M&A activity,” according to Andrew Holderness, global head of Clyde & Co.’s Corporate Insurance Group.
“Transactions have been overtaken on the corporate agenda by Brexit preparations as companies realize that there is no time to lose,” he said. “Elsewhere in Europe, political and economic uncertainty in markets as far apart as Greece, Italy and Russia continue to weigh heavy on investor sentiment.”
Nevertheless, insurers across the globe continue to investigate every avenue – both organic and inorganic – in an attempt to deliver growth to shareholders in a difficult trading environment, he went on to say.
Technology Tops M&A Agenda
Although insurtech investment dropped in the first quarter of the year – with funding at US$280 million, versus US$500 million in Q1 2016 – the use of technology as a solution to deliver growth remains a priority for many businesses around the world, according to the Clyde & Co. report, quoting figures from Startupbootcamp and PwC.
“The insurance industry’s focus on and interest in insurtech continues unabated – whether it is the development of insurtech organically within insurance companies and groups or through investments and acquisitions…,” said Sidhu.
The reason for such keen interest? He explained that the industry recognizes that insurtech promises to bring about dramatic changes in the near future to almost every aspect of the business.
Market Pressures Drive Disposals
“The rise of broker facilities and an increasing number of managing general agents entering the market is putting additional pressure on insurers and may result in an increasing number of businesses being put up for sale,” said Clyde & Co.
“Investment returns remain under pressure and abundant liquidity in the market means there’s little room to differentiate on price,” noted Holderness.
“One key area left in which to generate value is by addressing the cost structure and we will continue to see deals – such as Sompo’s acquisition of Endurance, the largest of the year so far – driven by a combination of desire to broaden international reach as well as to generate economies of scale,” he added.
“Deals are still getting done and a merger or acquisition remains an attractive route to generating value,” said Holderness. “While insurers continue to consider all the tools at their disposal in the quest for growth, there is good reason to expect that more M&A will get over the line in the coming six months.”
Holderness noted that deal making hot-spots are likely to include China where the regulatory environment is expected to ease and allow “a pent-up wave of M&A activity to resume, while overseas expansion” is set to continue.
“The run-off market is another area that has been attracting attention with Enstar’s acquisition of QBE’s legacy business just one example of this trend,” he continued.
Indeed, run-off M&A activity is expected to continue and may even accelerate as a result of Brexit, Holderness affirmed. “Continental insurers that decide not to write new UK business or vice versa after March 2019 will still have to decide what to do with their legacy books, and run-off specialists will be keen to offer a solution.”
Source: Clyde & Co.
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