A new study by Swiss Re Sigma entitled M&A in insurance: start of a new wave? (the Study) notes that M&A activity in the insurance sector is finally beginning to rise after a sharp decline in 2008 and 2009 resulting from the financial crisis. The Study is careful to note, however, that despite the recent spike, M&A insurance activity is still well below reported pre-crisis levels, with only 489 completed deals globally in 2014 as compared to 646 deals in 2007.
The role of structural and cyclical factors in insurance M&A
According to the Study, M&A activity in insurance is influenced by how firms and management respond to both structural shifts in the industry and cyclical economic factors. Structural shifts include regulatory, technological and distribution changes and cyclical factors include developments in business cycle, moves in financial markets and underwriting market conditions. The Study found that structural factors or cyclical factors alone only have gradual impacts on variations in M&A activity.
Recent surge in M&A activity: areas and causes
The Study hypothesizes that the overall increase in M&A insurance transactions actually stems from increases in 3 main areas: industry themes, specific geographical areas, and sectors.
In terms of industry themes, there have been upsurges in several key M&A themes recently, including divestment investments and strategic sales of closed blocks and run-off operations, transactions involving alternative investors, and strategic deals focused on expanding expertise, distribution capabilities and geographical reach. Geographically, there has been an increase in M&A insurance activity in Asia Pacific and in Latin America as well as in specific sectors such as Property & Causality reinsurance. And from a sector perspective, there has been a noted increase in consolidation among intermediaries as a result of structural shifts in insurance distribution.
The Study attributes the above increases in M&A activity to the introduction of new regulations that encourage insurers to restructure in pursuit of capital efficiencies and/or economies of scale or scope. The Study also speculates that the recent surge in M&A activity may be fueled by access to digital distribution technology.
M&A in insurance: predicting the future
While it is unlikely that we will see an industry-wide surge in M&A within the insurance sector, the Study predicts that M&A activity will continue to rise and build in the specific pockets of areas and sectors described above. It is also likely that globalization will result in continued increases in M&A activity among foreign insurers from both advanced and developing companies as a means of expanding into high growth markets, deploying capital and diversifying globally.
The author would like to thank Julia Bassett, articling student, for her assistance in preparing this legal update.