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11th March 2018
Clyde & Co annual Insurance Growth Report highlights recent uptick in M&As
There were 350 completed mergers and acquisitions(M&A) 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 global law firm Clyde & Co’s latest annual Insurance Growth Report, Unlocking opportunity in a disrupted world.
Andrew Holderness, Clyde & Co, Global head of Corporate Insurance, comments “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.
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.
"We expect 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. Alongside M&A, InsurTech is poised to become a mainstream driver for growth in the insurance sector.”
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 H1 to 96 in H2. 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 $6.3bn and Ironshore’s acquisition by Liberty Mutual for $2.9bn.
New York-based, Clyde & Co Partner Vikram Sidhu, adds "Many Bermuda-based companies face low growth, deteriorating margins and cost pressures. In parallel, US tax changes have diminished a key advantage for Bermuda insurers and reinsurers. That’s going to lead to greater deal activity involving Bermudian businesses in 2018.”
European deal numbers fell 22% to 118 in 2017, down from 151 the previous year. 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, we expect to see an increase in deals. 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.
The volume of completed deals in Asia fell 42%, from 72 in 2016 to 42 in 2017, principally due to foreign currency restrictions and regulatory uncertainty in China. As the Chinese government’s plans to reduce investment limits for foreign insurers remain on hold, this is generating further uncertainty in the market and hampering deals.
The report highlights 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.
Chongqing-based, Consultant to Clyde & Co Westlink JLV Michael Cripps, says “The regulator in China is moving to create a better regulated market that is governed in line with international norms and best practices. This will benefit policyholders and investors alike and open the door for more transactions once the new rules have bedded in.”
The report anticipates Japanese acquirers will continue to focus on overseas targets in 2018 while South East Asia remains on the radar for foreign investors.
Emerging markets continue to attract attention. 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. Legislation is also expected to have an impact in South Africa when the Insurance Bill is introduced in July 2018, making it difficult to operate without establishing a physical presence. Already there has been an increase in companies preparing to apply for a licence to open a branch.
2017 was the year in which InsurTech became a mainstream driver for growth in the insurance sector with funding volumes leaping by 36% to $2.3bn according to a recent Willis Towers Watson report. Traditional insurers and reinsurers are looking to digital solutions to help them boost their top line, 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".
The report points to Tesla’s option of purchasing ‘Insure My Tesla’ cover written by local underwriters, which include Direct Line in the UK. Amazon has launched its new insurance division in London and is hiring aggressively.
Hong Kong-based Clyde & Co partner Kevin Martin says: “A huge digital ecosystem has been constructed by technology companies that allow them to have a detailed understanding of their customers, the use of big data is allowing the more powerful and innovative technology companies from Alibaba to Amazon to enter the insurance market, using their existing platforms as powerful distribution and analytics tools. This has the potential to turn the traditional insurance industry on its head for personal lines business.”
Clyde & Co Trends(15 articles)