What drove insurance M&A in 2018 and what's next?

The insurance headlines this year were dominated by the merger and acquisition as Marsh unveiled its mammoth tie-up with JLT, uniting the world’s first and seventh biggest brokers.  

But it’s not just the intermediary market which has seen an upswing in M&A activity.  

This summer saw Esure’s £1.2bn sale to private equity house Bain.  

And this deal follows the take-over earlier this year of XL by AXA, Allianz’s tie-up with LV= and reports of discussions between Covea and Scor.  

Clyde & Co, the specialist in insurance law, publishes a six-monthly snapshot of insurers M&A.  

The most recent report, published during the summer, showed that the first half of this year saw continued growth in insurance M&A worldwide.  

It’s not hard to see why boards will be looking for exit opportunities.  

Reasons for M&A

Their companies are often cash rich but profits poor, chasing volume in order to maintain cashflow even if this means sacrificing margins.  

Andrew Holderness, global head of corporate insurance at Clyde & Co, identifies these tough trading conditions as the chief factor driving consolidation.  

He says: “The market remains very competitive, rates remain under pressure and investment remains low. There’s only so much you can do organically.”  

Ed Johns, director of transaction services (financial services) at PwC, agrees. “With interest rates remaining low, investment returns still pretty poor and rates soft, companies are still under pressure.”  

The flooding of the market by insurance linked securities is adding to the pressure at the reinsurance end of the spectrum, says Johns: “The significant amount of capital in the market is keeping premiums low and rates low.” 

Last year’s hurricane season, which resulted in record breaking losses would have been expected to fuel an increase in rates, leading some to question at the time whether ILS-backed operators would remain in the game.  

But that didn’t happen, says Holderness: “They’re absolutely still here. 12 months on, they haven’t blinked. They’ve paid out and recapitalised.” 

“We expected to see some green shoots, but rates overall stayed pretty soft.” 

And last year’s losses have themselves provided a further spur consolidation, says Johns: “Insurers need, to reload, particularly in the London market, so are looking for capital to come in.”  

Brexit questions

Brexit itself is not viewed as a particular spur for M&A with most insurers having carried out organisational tweaks to ensure that they remain compliant once the UK leaves the EU.  

The post-Brexit devaluation of the pound though is spurring interest in UK companies, Johns says :“The weakness of the pound means the UK market is more attractive to international buyers than in the past.” 

If raising rates is so difficult, the other way of growing premium income is to access fresh clients by getting into new markets.  

The last few years have seen an explosion of interest by private equity houses in GI brokers sparking the latest great wave of consolidation in the sector. The Esure acquisition, following on from Apollo’s purchase of Aspen shows that the sector has an appetite for insurers too.  

Sidley Austin’s latest Annual Global Insurance Review highlighted private equity firms’ continuing strong interest in the European insurance sector,  

David Lambert, partner in the transaction services team, at Ernst & Young, says the hot nature of recent auctions shows private equity is eager to invest in the sector.  

Private equity changing

Private equity and insurers might look at first sight like unnatural bedfellows. Insurers have for years failed to generate the kind of fat margins that the sector classically sought in private equity’s mid noughties heyday.  

However private equity is changing its spots. Recent years have seen the sector become increasingly popular with pension funds, which are prepared to accept a lower and steadier return profile than private equity has traditionally offered.  

“They’re looking for good returns not necessarily shoot the lights out returns,” says Lambert.  

Johns argues that insurers are still ‘relatively under-represented’ in many private equity portfolios.  

Insurance offers such investors an uncorrelated risk in their portfolios, which can help to smooth returns over the economic cycle, he says: “The movement in valuations of insurance companies is not necessarily correlated to the banking market or economy or various other factors.” 

And the industry still provides opportunities for private equity investors to increase returns by squeezing out inefficiencies, Johns says: “Operational efficiency is clearly still important. There are businesses that have not been run particularly efficiently for a number of years so there are opportunities to improve efficiency.” 

“It’s difficult to price the impact of technology but the weight of evidence is consistently growing that technology can bring an awful lot of efficiency and people are starting to look at ways of pricing that in.” 

Chinese and Asian investment interest 

And it’s not just the private equity houses which are threatening to upend the insurer world. The industry has also been catching the eye of Far Eastern investors.  

Asian insurers are still looking to grow ‘aggressively’, says Lambert: “A huge amount of capital is coming from Asia.” 

Recent months have seen rumours that Chinese insurer Fosun has put in a bid for Ageas, following hot on the heels of China Re’s acquisition of Chaucer.  

At one point, Chinese investors seemed to be pulling in their horns in response to a clampdown by the country’s government and regulators on overseas investment 

However the Chaucer transaction shows that Chinese investors are back in the game, says Holderness: “It’s shown its doable.” 

And there remains plenty of appetite amongst Chinese investors for UK insurers, says Johns: “It gives them access to a well-established market that allows them to deploy capital outside of China.”   

But Lambert, noting that not long ago the XL-Catlin tie-up was a very large merger, itself turned into an acquisition target earlier this year, expects the next year to see a healthy level of M&A activity to continue.  

“I expect the very large insurers to continue to get larger.” 

And the consolidation process has its own self-sustaining momentum, he adds: 

“One big shake up will have an impact on the others because the adjacent businesses will have to think about their own positions.”  

And within the UK market, firms currently focused on how to deal with the ramifications of Brexit will start to refocus on the future of their wider businesses. The upcoming year looks set to see fresh M&A in the insurer world