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2017 an “environment of cautious optimism” for U.S. & Bermudian M&A: Deloitte

13th April 2017 - Author: Staff Writer

Deloitte has proclaimed its M&A outlook for this year an “environment of cautious optimism,” saying it expects U.S. and Bermudian re/insurers to plan for, but delay final execution of mergers & acquisitions until implications of potential regulatory and tax code changes become clearer.

“Entering 2017, the post-election stock run-up and quarter-point interest rate rise are signs of a strengthening economy that have boosted investor confidence.

“We expect that companies may plan for but delay M&A for up to the first six months of 2017 as executives watch for market corrections within insurance sub-sectors and evaluate the impact of new regulations and Congressional activity on the economy,” said Deloitte analysts.

The market remains optimistic that changes to U.S. tax and regulatory schemes will drive re/insurance growth, but uncertainty surrounding how these changes will play out appears to be placing the industry on standby: “It is possible that the Trump administration and Republican- controlled Congress will make some very significant changes to  financial services industry regulations and the US tax code in 2017.

“While lack of clarity about specific proposals and their timing may be a short-term inhibitor of M&A, once implemented, some of the changes may drive increased deal- making as the year progresses.”

Over the last years, foreign investors, particularly Chinese and Japanese companies, have driven a 16 percent increase in the foreign direct investment position in the insurance industry since 2013 – taking advantage of plentiful capital and cheap debt to diversify earnings within the international market, but Deloitte said its unclear whether Asian buyers’ appetite would “remain as strong as it was in 2014 and 2015.”

Deloitte expects European re/insurers operating in the U.S. to pick up activity in the latter part of 2017 and throughout 2018.

“We are unlikely to see mega-deals of the scale we saw in 2015, but we anticipate eight to 10 highly strategic, $1+ billion deals driven by both domestic and foreign acquirers,” Deloitte explained.

And although there may be a plethora of eager buyers with sufficient cash, despite high valuation levels, Deloitte said an unwillingness or hesitation over selling within the sector may mean there’s a lack of targets and therefore fewer deals.

Further factors impacting U.S. and Bermudian M&As are the same market trends driving mergers throughout the wider global market; “capital in the P&C and reinsurance sub-sectors is at an all-time high and organic growth is exceptionally difficult to come by, making them ripe for middle-market consolidation.”

“At an individual company level, lack of organic growth prospects may prompt organizations to look for ways to cut costs and grow inorganically—a potent combination to drive consolidation. Also, the need to scale and make continued technology investments remains acute.

“Among likely macro-level tailwinds is an environment of continued slower economic growth that will likely drive only low-single-digit organic growth opportunities for insurers—although the post-election stock market climb appears to re erect investors’ expectations for faster growth in the coming year,” said Deloitte.

And the Deloitte forecast is much in line with the M&A market outlook offered by industry experts across the board, who are predicting a consolidation hike globally this year.

Financial advisory firm KPMG said a key motivator for M&A activity was businesses adapting their business model to deal with the emerging market space.

KPMG Global Lead Partner for the U.S. Insurance Deal Advisory, Ram Menon, commented; “Insurers are clearly hungry for good M&A opportunities, they are focused on transforming their business and operating models, and even with geopolitical uncertainties, they are aggressively looking at deals that can help meet their objectives.”

Commenting on market survey results, KPMG identified the U.S. as the expected key target for acquisitions on a national basis this year – confirming that once geopolitical uncertainties are out-of-the-way, the second half of 2017 could see a U.S. market M&A takeoff.

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