Mergers and acquisitions in the global insurance industry rose in the first half of the year with 201 completed deals, up from 197 in the second half of 2019, according to Clyde & Co’s Insurance Growth Report mid-year update. This was only the second six-month period in the last five years where transaction volume topped 200, Clyde & Co reported.
“The deals completed in the first half of 2020 would have been negotiated and agreed back in 2019, pre-pandemic,” said Ivor Edwards, partner and European head of the Corporate Insurance Group at Clyde & Co. “The impact of COVID-19 on insurance M&A will only become clear in the coming months, and we expect it to be stark in the short term. For many, responding to the pandemic has meant putting growth ambitions to one side in order to take stock of the impact on operations, claims and investment returns. The last few months have been plagued by a level of uncertainty – the enemy of dealmaking – rarely seen before. This will be reflected in the number of completed deals in the second half of the year. But as the economy moves towards a state of stability that could be defined as ‘the new normal,’ opportunities will arise, and we expect reinsurance transactions to make a comeback in 2021.”
The first half posted a slowdown in mega-deals, with only six valued over more than $1 billion (AU$1.38 billion), compared to 20 in the whole of 2019.
Heightened strategic focus
“Strategic and financial buyers had already begun to place heightened focus on deals that really make sense for them, which is a trend that will accelerate in the fallout from COVID-19,” said Vikram Sidhu, Clyde & Co partner in New York. “As the pandemic continues, we will see a range of distressed businesses as well as reinsurers pulling out of certain lines, industries or geographies. Those liking to rationalise their operations will move to divest divisions and books of businesses that do not fit with their core strategy or their financial goals. In 2021, we expect an increase in the number of such businesses being offered for a sale and a greater interest in legacy business that could lead to a burst of deal activity.”
Technology continues to be a primary driver of growth globally, Clyde & Co reported. Deals in the first half included investments in US-based start-up Openly, Belgium-based Keypoint and United Arab Emirates-based yallacompare.
“While insurtech investment dived in Q1 due to COVID-19, it rebounded in the second quarter,” said Joyce Chan, Clyde & Co partner in Hong Kong. “Although investors have already become more selective since last year, a trend that the pandemic will strengthen, high-quality tech offerings are still attractive, provided they can prove their worth. Start-ups now reaching maturity with a proven track record are ripe for acquisition, and we expect this be a key deal driver in H1 2021.”
Capital raising – which reached $16 billion in H1 (approx. AU$22 billion) – has presented organic growth opportunities in the post-pandemic market that could depress M&A appetite, Clyde & Co reported.
“COVID-19 has accelerated the market hardening that was already underway, and reinsurers are keen to write more risk at a higher price but need to offset losses from COVID19 in order to do so,” Edwards said. “As rates rise, there is also the potential for a wave of new start-ups and scale-ups, as we have seen in the aftermath of other major loss events in the past, albeit the situation is now more nuanced than post-Hurricane Katrina, for example. That has not deterred a range of market figures from exploring options, and there has been a succession of headlines around early-stage start-up plans.”
Outlook by region
M&A activity in the Americas was flat in the first half, with 90 deals compared to 89 in the second half of 2019. Deals in the US dropped from 73 to 64, marking the third straight period of decline.
“The US insurance M&A activity had already been slowing down before the pandemic began,” Sidhu said. “After a sustained period of dealmaking, valuations had risen and some investors had been pausing to take stock. Others had been wary of geopolitical tensions, particularly with China, and the upcoming US election had added another layer of uncertainty. The pandemic has added to that slowdown, although deal activity continues. Going forward, dealmakers will continue to look for attractive opportunities, although the time taken to reaching a deal is likely to be longer than normal for the foreseeable future.”
The Asia-Pacific region saw M&A deals tick up to 38 in H1 from 31 in the previous six months, with Japanese acquirers once again leading the way.
“In the short to medium term, reinsurers in some markets in Asia Pacific are under pressure and still working out the impact of COVID-19 on their operations,” Chan said. “As margins become further squeezed, they will be re-evaluating their strategies and looking to redeploy resources to where they will be more profitable, which may lead to exits from certain jurisdictions or lines of business. Further out, we expect an increase in activity in China, where new regulations to facilitate consolidation and inbound investment are in place but yet to be tested, while the possibility of a link between the Greater Bay Area and Hong Kong could offer an alternative route into China for foreign investors.”
In Europe, the reverberations of Brexit combined with difficulties in reaching agreement on valuations pushed M&A to a three-year low, with 53 deals completed. That’s down from 67 in H2 2019.
“The outlook for Europe is mixed and will depend on the length and depth of the recession,” Edwards said. “We will likely see European banks and insurers looking to dispose of non-core assets that will generate a pool of targets for acquirers, but limitations on capital will prevent some general insurers from making acquisitions. At the same time, insurers from less mature markets may sense an opportunity to establish or strengthen a presence in Europe, possibly at a favourable price.”