The business environment remains challenging as political and economic uncertainty continues to increase. Global growth is expected to slow this year, while emerging market and developing economies have lost momentum. Brexit, trade wars and protectionism are casting long shadows.
Although 2018 was estimated to be the fourth costliest year in the last fifty in terms of insured losses worldwide, significant rate rises have failed to materialise while the abundance of capital in the market persists. Stiff competition on pricing, stock market volatility and persistently low interest rates mean that delivering a profit is challenging.
Against this backdrop, re/insurance businesses worldwide are examining every avenue in the search for growth.
M&A continues to climb but storm clouds gather
In the quest to deliver a positive underwriting result, re/insurers are returning to two fundamentals increasing premium income, by building on their existing offering or accessing new customers and markets, or reducing their cost base.
A merger or acquisition remains a key strategy to deliver on these twin growth priorities and transaction activity worldwide was buoyant in 2018. However, with the Americas seeing a slight decline in the second half of the year, and anecdotal evidence suggesting a heightened sense of caution in multiple geographies in the light of uncertain market conditions, we predict 2019 will see a temporary lull in deal-making in some regions.
Volume of deals completed globally, 2009 - 2018
382
Completed deals in 2018
350up from the previous year
H2 2018 marked third consecutive period of rising M&A volume
0 50 100 150 200 250 300 350
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
H1 291 H2 282 H1 272 H2 250 H1 289 H2 266 H1 244 H2 200 H1 162 H2 157 H1 192 H2 192 H1 225 H2 219 H1 201 H2 186 H1 170 H2 180 H1 186 H2 196
2
3
Top trends for 2019
The changing appeal of new markets
For many, accessing new customers continues to mean taking a stake in an overseas business and cross-border acquisitions continued apace in 2018. This trend is set to continue. Meanwhile, in a reversal of this pattern, an increasing number of companies that had entered into emerging markets as far apart as Latin America, the Middle East and Southeast Asia have been reviewing their positions and are opting to withdraw. In these cases, almost universally, returns have failed to deliver on expectations and, with pressure on core operations to deploy capital more efficiently, exiting the market is the most viable solution.
Targeting the entire insurance value chain
Carriers are increasingly looking both up and down the insurance value chain for opportunities. The spate of deals involving Bermudan targets has been driven by the realisation that being a mono-line reinsurer is no longer viable. A growing acceptance that alternative capital is here to stay has seen some re/insurers move in on ILS targets, with Markel's acquisition of Nephila being the largest. Meanwhile, at the smaller end of the market, there are an increasing number of transactions involving insurers acquiring MGAs in order to gain access to new customers as well as specialist underwriting expertise.
The search for scale continues
A number of deals at the top end of the market in 2018, including the year's largest, AXA's USD 15.1 billion acquisition of XL Catlin, were driven by the desire to extend geographic footprint, expand into new lines of business and reach new customers, with the additional benefit of generating significant cost synergies. In 2018 there were 18 mega-deals valued in excess of USD 1 billion and we expect further consolidation towards the top end of the market in the coming year with a number of large businesses across the world, including Zrich, Tokio Marine and Berkshire Hathaway, actively on the acquisition trail.
Regulation remains a key transaction driver
Rule changes in a number of jurisdictions are having an impact on M&A. In China, a slew of new regulations has led to a spike in interest from foreign insurers and we expect a number of significant transactions to emerge through 2019. In Australia, a public enquiry into the regulatory framework is increasing pressure on domestic insurers to focus more on core activities which has driven M&A activity throughout SE Asia. Meanwhile, tighter capital requirements in markets across SE Asia, the Middle East and South Africa will lead to consolidation or players being forced out of the market.
Distress driving disposals
Following years of pricing pressure some insurers are running out of road. Companies at the fringes of the market will be looking at their long-term solvency and although some are releasing reserves, this option has pretty much run its course. We expect to see distressed businesses put up for sale. The Lloyd's market could provide rich pickings with around 20 syndicates exiting different classes there is a substantial quantity of discontinued business which will either be closed naturally or sold to another syndicate, presenting the potential for billions of dollars' worth of legacy deals.
4
Spotlight on: The technology imperative
Technology has become a key driver of M&A. On the operational side of the business, although there is a risk involved in integrating legacy systems, the potential synergies a transaction delivers can be amplified by the application of technological innovation to streamline processes, resulting in significant cost savings and financial benefits.
Technology is also the skeleton key that unlocks multiple doors to new customers. Companies with the deepest customer insights will become increasingly dominant and M&A immediately delivers the acquiror a vastly expanded pool of data.
A transaction can also be the easiest way to access innovation. Examples of insurers buying insurtech startups increased in 2018, with some acquirors looking at companies at a very early stage of development, while others prefer slightly more established targets with proven business models.
However, M&A is not the only route to innovation. Some prefer to keep their research and development in-house through their own digital labs, take a stake in a start-up through corporate venturing or team-up via a joint venture or other type of partnership.
Overall, the technology fear factor has diminished. Two or three years ago companies were wary that their business could be taken out by disruptors such as Amazon or Google. Today, the threat is perceived as being most acute in certain segments or niches of the market. Insurtech is still most prevalent in personal lines but 39 per cent of insurtechs are now focused on the commercial segment, mostly in small and medium-sized enterprises.
But giants have emerged, not least China's Zhong An, which has developed such an impressive platform that it is effectively positioning itself as a technology company first and foremost. Whichever part of the industry they are focused on, as re/insurers consider their growth strategies for the year ahead, technology remains an imperative.
Overseas targets remain popular
The coming year will be marked by shifting trends in terms of cross-border M&A. With a diminishing number of potential targets, deal-making in Bermuda will likely fall, especially at the top end of the market. In contrast, regulatory change across the Middle East points towards a long-expected pick up in transactions.
However, Asia-Pacific is likely to be the most active region with a continued increase in both inbound and outbound M&A. Underpenetrated markets still offer attractive growth prospects for foreign investors while re/insurers based in Japan, China and increasingly South Korea will look further afield for acquisition targets.
Percentage of outband M&A deal by region
NORTH AMERICA
99
completed
cross-border deals in 2018,
26% of global total
50
of the cross-border
deals in 2018 were
intra-region
28% 10%
8%
EUROPE
15% 3% MEA
11% 30%
8% 44%
50%
LATIN AMERICA
5
APAC
Regional focus set to shift
Deal-making in the Americas dipped in the second half of 2018, a trend that is likely to continue in the coming months. This is partly due to the natural cycle of the market, but also because of a heightened sense of caution in the market. Uncertainty is the enemy of deal-making and as investors follow economic and political developments with interest, an increasing number are slipping into `wait-and-see' mode. In Europe, after two years of ups and downs, Brexit uncertainty is at a peak and we expect M&A in the region to see a temporary dip in the first half of 2019. As such, Asia Pacific will see an uptick in the global share of deals.
Percentage of deals by region
60 50 40 30 20 10 0
Americas
Europe
APAC
MEA
2009 H1 H2
2010 H1 H2
2011 H1 H2
2012 H1 H2
2013 H1 H2
2014 H1 H2
2015 H1 H2
2016 H1 H2
2017 H1 H2
2018 H1 H2
6
Bigger deals 47 in the ascendancy
1832 transactions valued at USD 1 billion+ in 2018, 17 compared to
2 16 transactions valued at USD 1 billion+ in 2017
7
Activity up in the Americas, Europe and APAC, down in MEA
Global Americas Europe APAC MEA
2017
350 176 118 42
11
Slowdown on the horizon
Global Americas Europe APAC MEA
H1 2018
186 97 59 25 4
2018
382 189 122
59 8
% change
+9.1% +7. 3 % +3.4% +40.5% -27. 3 %
H2 2018
196 92 63 34 4
% change
+5.4% -5.2% +6.8% +36.0%
-
APAC sees the biggest increase
driven by acquirors in Japan, China and Australia
Americas saw first decline in M&A
for two years in H2 2018
Brexit uncertainty
and trade wars expected to slow M&A in coming months
2019 a year of two halves?
While we predict a slowdown in M&A in some markets in the first six months of 2019, the second half of the year could see a return to form. With clarity around Brexit finally achieved, the disruption that will follow will generate opportunities, especially in the run-off market. Meanwhile, with no significant hardening of the market on the horizon, we expect the need to dispose of non-core assets to persist. And finally, with technology investment gathering speed, re/ insurers will continue to look for acquisition targets that can deliver the innovation that can enhance efficiencies and deliver better client service.
50+
Offices worldwide*
3,800
Total staff
415
Partners
1,800
Lawyers
www.clydeco.com
*includes associated offices Clyde & Co LLP is a limited liability partnership registered in England and Wales. Authorised and regulated by the Solicitors Regulation Authority. Clyde & Co LLP 2019
J452679 - February 2019
About the Clyde & Co Insurance Growth Report
The Clyde & Co Insurance Growth Report is report is based on data by Thomson Reuters and Alacra for completed mergers and acquisitions in the global insurance industry in the period 2009 to 2018 for businesses with the SIC codes: 6311 Life Insurance, 6321 Accident and Health Insurance, 6331 Fire, Marine, and Casualty Insurance, 6351 Surety Insurance, 6361 Title Insurance and 6399 Insurance Carriers, Not Elsewhere Classified. Additional input, analysis and insight was gathered from face-to-face and telephone interviews with Clyde & Co partners around the world during December 2018 and January 2019, supplemented by existing third-party research.
