Big-ticket merger and acquisition (M&A) transactions were few and far between in 2017. After a slow start to the year, things started to pick up with the Americas posting almost 100 deals in the second half of the year.
By contrast, 2018 has seen anything but a slow start, with two mega deals in the first three months. In January, American International Group, Inc. (AIG) announced plans to purchase all outstanding common shares of Validus Holdings, Ltd. for US$5.56 billion in cash, putting an end to a long period of retrenchment for the insurer. The deal boosts AIG’s general insurance business by adding a leading reinsurance platform, an insurance-linked securities asset manager, a meaningful presence at Lloyd’s and complementary capabilities in the US excess and surplus (E&S) markets.
Then came the AXA – XL Group announcement and an acquisition deal likely to dwarf all others in 2018. In March, it was revealed AXA agreed to pay US$15.3 billion in cash to own 100% of XL Group in a deal set to create what has been described as ‘the number one global property and casualty commercial lines insurer.’
“The AIG-Validus and AXA-XL deals are two big ticket transactions that will drive 2018 M&A activity, regardless of how the final numbers play out,” said Robert Fettman, counsel, Hogan Lovells. “I think we’re probably going to see a return to larger, more transformative transactions, which were absent for most of 2017. Even though the deal volume might be lower in 2018, the nominal dollar amount could end up higher than previous years if it’s skewed by these larger transactions.”
Fettman told Insurance Business he expects 2018 to bring further consolidation in the reinsurance and P&C markets, particularly among specialty carriers, and continued disposals of run-off and non-core businesses by US insurers seeking to restructure around core products or shed underperforming blocks.
Strong interest in specialty insurers is not a new phenomenon. There were a number of high profile deals in 2017, such as Assurant’s US$2.5 billion purchase of The Warranty Group, which provides insurance protection plans in areas including consumer electronics and appliances. Canada’s Intact Financial Corporation continued the trend in March 2018 by agreeing to acquire US specialty insurer One Beacon Insurance Group for US$1.7 billion.
“Buyers are interested in specialty insurers because it enables them to add diversification to their books,” Fettman commented. “They may see specialty insurers as counter-cyclical and therefore a good addition to some of their more traditional insurance lines. The returns are often better in specialty lines, so buyers might be tempted to tap into that.
“On the flip side, some companies will be looking to shed non-core lines of business in order to strategically focus on lines that drive the majority of their transactions. So far, the two primary buyers of run-off businesses have been specialists looking to aggregate non-core lines, and private equity companies, who are hoping to get better returns on the reserves. I expect this trend to continue this year.”
Another area dominating discussion around insurance M&A is the rise in consolidation of insurtech startups. As the insurtech space continues to evolve and mature, we are likely to see more activity in that space. However, Fettman expects more “large joint ventures” between carriers and insurtechs over actual acquisitions.