Global insurance M&A hits two-year low: Clyde and Co report

The volume of completed mergers and acquisitions (M&A) worldwide in the insurance industry continued its downward trend, with 170 deals in the first six months of 2017 compared to 186 in the preceding period, according to a new report from international law firm Clyde & Co.

Activity is now down 24% from its recent high in the first half of 2015, when there were 225 deals, as insurance businesses continue to pursue a range of routes to growth, the Clyde & Co Growth Report mid-year update noted.

Activity in the Americas was up to 86 transactions so far this year compared to 81 in the preceding six months. Activity in Europe in down 28% in the last six years, in part to the “distraction” of Brexit, the United Kingdom’s decision to leave the European Union, Clyde and Co said in a press release on Thursday. Completed deals in Asia Pacific fell to 22 from 36 in the second half of 2016, partly due to temporary monetary controls in place in China. The Middle East and Africa saw a slight uptick in M&A, albeit from a low base, with eight deals compared to just two in the prior period.

Andrew Holderness, global head of Clyde & Co’s Corporate Insurance Group, said in the release that “uncertainty is the enemy of deal-making. M&A has risen in the Americas now that the uncertainty that plagued the market in the run-up to the U.S. presidential election has eased somewhat. However, in Europe, uncertainty persists with Brexit acting as a significant brake on M&A activity. Transactions have been overtaken on the corporate agenda by Brexit preparations as companies realize that there is no time to lose. Elsewhere in Europe, political and economic uncertainty in markets as far apart as Greece, Italy and Russia continue to weigh heavy on investor sentiment.”

Furthermore, “growth remains a shareholder imperative in an increasingly difficult trading environment, and insurers are investigating every avenue – both organic and inorganic – in an attempt to deliver this, wherever they are in the world,” Holderness said.

Regarding technology, despite a reported drop off in insurtech investment in the first quarter of the year – with funding at US$280 million, down US$500 million from the same quarter in 2016 according to figures from Startupbootcamp (a global network of startup accelerators) and PwC – the application of technology as a solution to deliver growth remains a priority for many businesses around the world. Holderness said that technology offers “new distribution routes and access to new markets and new customers, the holy grail for any insurer with growth ambitions. At the same time, technology can bring substantial efficiencies and slash costs, resulting in a dramatic impact to the bottom line and will continue to dominate the corporate agenda of insurers for the coming years.”

Global technology investments may be relatively small, such as the acquisition of Ireland’s Blink Innovation by the U.K.’s CPP Group for around US$1 million in March, especially in comparison to the value of the larger, big-ticket M&A. However, they retain strategic importance and considerable potential, the release said. For example, Zhong An Online Property and Casualty Insurance, China’s first online-only insurer, is expected to raise US$1 billion in an initial public offering later this year, just three years after start-up.

Another key factor in M&A is the rise of broker facilities and an increasing number of managing general agents entering the market, which is putting additional pressure on insurers and may result in an increasing number of businesses being put up for sale. “The environment hasn’t got any easier for insurers in the last six months,” Holderness commented. “Investment returns remain under pressure and abundant liquidity in the market means there’s little room to differentiate on price. 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.”

As markets become less exposed to political and economic uncertainty, the volume of M&A is expected to stabilize or rebound in the second half of the year as insurers continue to drive for growth and new sources of value, Clyde and Co suggested in the release. “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. Hot-spots for deal making are likely to include China, where the regulatory environment is expected to ease, allowing a pent-up wave of M&A activity to resume, while overseas expansion as evidenced in the acquisition earlier this year of Singapore’s Asia Capital Re by a China-based consortium is set to continue.”

Another area that has been attracting attention is the run-off market, with Enstar’s acquisition of QBE’s legacy business as one example, Holderness said. “Activity in this part of the market is expected to continue and may accelerate as a result of Brexit,” he added. “Continental insurers that decide not to write new U.K. 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.”