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Insurance sector M&A declines in H1 but expected to rebound: Clyde & co

8th August 2017 - Author: Luke Gallin

The volume of insurance mergers and acquisitions (M&A) in the first-half of 2017 declined by 8.6% to 170 deals when compared with the preceding six months, although more deals are expected in the remainder of the year, according to Clyde & Co.

mergers and acquisitions reinsuranceClyde & Co’s recently published mid-year 2017 Growth Report reveals a continuation of the downward trend of the volume of M&A activity in the global insurance and reinsurance industry so far in 2017, when compared with the preceding six months and the record 225 deals witnessed in H1 2015.

Clyde & Co explains that when compared with the high seen in H1 2015, insurance sector M&A so far in 2017 is down by 24%, as insurance firms continue to look at multiple growth avenues.

“Uncertainty is the enemy of deal-making. M&A has risen in the Americas now that uncertainty that plagued the market in the run-up to the US 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 realise 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 heavily on investor sentiment.

“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,” said Andrew Holderness, Global Head of Clyde & Co.

By region, the report shows that insurance sector M&A activity in Europe has declined by 28% over the last six months. In Asia, completed M&A deals declined from 36 in H2 2016 to 22 in the first-six months of this year.

In Europe, Clyde & Co attributes some of the decline to the distraction caused by Brexit, while temporary monetary controls in China likely contributed to some of the decline witnessed in Asia.

Deal activity across the Middle East and Africa actually increased in the period, up from two deals in H2 2016 to eight deals in H1 2017. The Americas also recorded an increase in deal volume in 2017, from 81 transactions to 86 transactions.

According to Clyde & Co technology remains a top priority for many insurers around the world, with companies eager to increase efficiency and deliver growth via the use of advanced technology and solutions.

Holderness, expanded on this point; “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.”

Investments in technology do remain relatively small across the industry, but this doesn’t take away from the strategic importance and potential such investments or deals have, explains the report.

Clyde & Co also explains that the rise of the broker facility and the persistent entry of managing general agents in the marketplace is fuelling pressure on insurance firms, which could see more and more look to strike a deal in the months and years ahead.

“The environment hasn’t got any easier for insurers in the last six months. 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,” said Holderness.

Looking forward, Clyde & Co expects insurance sector M&A activity to stabilise or rebound in the second-half of 2017 as political and economic uncertainty subsides.

“Deals are still getting done and a merger or acquisition remains an attractive route to generating value. 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.

“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. Activity in this part of the market is expected to continue and may accelerate as a result of Brexit. 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,” said Holderness.

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