2018 saw a buoyant transaction market in the global insurance industry with a total of 382 deals completed worldwide, a 9% increase on the previous year. With the exception of the Middle East and Africa, all regions saw an increase in M&A. However, signs started to emerge in the fourth quarter of 2018 of a slowdown in deal-making and, as we look to the year ahead, we expect a mixed picture. Following part one of our insurance growth report, which presented a review of worldwide transaction activity, here we analyse M&A trends by region.
US M&A activity will dip in H1 2019, albeit from a previously high level. Key drivers of activity will include the quest for innovation, with insurtech companies increasingly being targeted for acquisition. This will result in a higher number of deals, albeit smaller in terms of deal value. Meanwhile, with alternative capital here to stay, US re/insurers continue to look for opportunities to access such capital including through the ILS market.
Americas will dominate global deal-making even as volume dips
The Americas, driven by the US, was once again the most active region for M&A in 2018. Eleven of the year's largest deals worldwide involved acquirors based in the region. While deal-making in the Americas will continue in 2019, there are some interesting trends emerging beneath the headline numbers.
Anticipating a down-cycle in the US economy, insurers will be reviewing operations and potentially selling off books of business. Overseas ambitions have been reined back amid trade tensions with China and Brexit uncertainty in Europe. Although businesses are pulling away from some emerging markets as they refocus attention on their core operations, overseas acquisitions remain attractive. Some 21% of deals involving Americas acquirors in 2018 had cross-border targets. One example is Canada's Fairfax Holdings, which made acquisitions in Hong Kong and India in 2018, as well as at home. Other Canadian M&A last year mainly involved domestic or US targets.
While Latin America continues to offer growth opportunities, many are approaching the region with a renewed sense of caution, principally due to a combination of political and economic uncertainty in a number of major markets. There were a small number of domestic deals in 2018, including the world's fourth largest in Chile, Bordeaux Hldg Spa's USD 2.7 billion acquisition of Banmedica SA.
After several years of robust deal activity, and a number of sizeable transactions in 2018, M&A in Bermuda will slow down in the coming year. While targets remain, the pool is getting smaller. We don't expect to see transactions of the size we saw in 2018, but the key driver to sell remains the historical Bermudan mono business model is under challenge and companies need to focus on where the future lies in large global insurance groups
Vikram Sidhu, New York
Volume of deals in the Americas Jan 09 - Dec 18
Most active countries 2018
by number of deals
0 20 40 60 80 100 120 140
H1 102 H2 99
H1 107 H2 104
H1 132 H2 136
H1 129 H2 83 H1 77 H2 62
H1 71 H2 95
H1 122 H2 89
H1 84 H2 81
H1 86 H2 90
H1 97 H2 92
The US insurance industry's strategic focus is centred around technology, and all M&A transactions will continue to be assessed through that lens. Insurers are pushing for innovation within their organisations, but also investing in insurtech start-ups that will address the need to automate systems and deliver a better customer experience.
Christina Terplan, San Francisco
Positive insurer sentiment around the region is driving transactions. Most of the deals are not consolidations; they are international in scope as insurance groups look to build out their platforms in particular countries to access new customers and drive growth.
Joyce Chan, Hong Kong
Asia Pacific returning to form as regulators make their move
After a quiet 2017, Asia Pacific saw a return to form in 2018 with a healthy increase in deals led by acquirors in Japan, China and Australia. There are signs of more to come this year.
Regulatory developments in China have opened the way for more domestic consolidation and removed some of the hurdles for foreign investors. As a result, we expect some interesting deals to follow. Chinese re/insurers also have overseas growth ambitions of their own and the acquisition of Chaucer by China Re for USD 940 million may herald more outbound activity into the Lloyd's and wider international markets.
Japanese re/insurers have been some of the most active on the acquisition trail for a number of years, a trend that will continue. Large players including Tokio Marine and Sompo Holdings have announced they are on the lookout for targets and have the capital to finance transactions.
In 2018, there was a mix of domestic and overseas targets. Two of the largest deals involving Japanese acquirors saw MassMutual Life Insurance Co. bought by Nippon Life for USD 980 million and MS&AD Insurance Group Holdings move for ReAssure Jersey One Ltd in a USD 820 million deal.
Technology is a key driver of growth across the region and a number of markets in Southeast Asia offer exciting insurtech growth prospects, notably Indonesia, Singapore and Vietnam. Vietnam is also attracting attention as an alternative manufacturing location to China. As foreign investors enter the country their insurers aren't far behind, with moves expected by South Korean insurers.
Volume of deals in APAC Jan 09 - Dec 18
In line with the global trend of regulation driving M&A activity, shareholders in Australia are increasing pressure on re/insurers to focus more on core activities. This has driven deals throughout South East Asia as companies move to divest regional assets we expect more to come.
Most active countries 2018
by number of deals
Avryl Lattin, Sydney
0 10 20 30 40 50 60
H1 26 H2 35
H1 29 H2 33
H1 52 H2 23
H1 21 H2 38 H1 28 H2 27
H1 33 H2 26
H1 26 H2 52
H1 36 H2 36
H1 22 H2 20
H1 25 H2 34
Insurtech investment in France over the last five years has accounted for only around 2% of the global total, but French re/insurers are increasingly eyeing opportunities in the technology sector as they seek access to new distribution channels, either by taking an equity stake or developing a strategic partnership with a start-up.
Yannis Samothrakis, Paris
Technology and Brexit will be key factors influencing M&A in Europe in 2019
Europe saw a slight increase in deals in 2018 and maintained its position as the world's second most active region for M&A behind the Americas. Given the size of its market, the UK typically sees a high volume of dealmaking, and the country ranked third worldwide last year behind the US and Japan. But for the uncertainty around Brexit, we would have expected more transactions.
The largest domestic deal of the year was Phoenix Group's USD 4.1 billion acquisition of Standard Life Aberdeen's insurance arm, while the biggest inbound move saw Jersey's Blue Bidco Limited, a subsidiary of funds advised by Bain Capital Private Equity, acquire Esure Group for around USD 1.5 billion. Looking ahead, deal-making in the UK is likely to slow in the first part of 2019, before transactions pick up again in the second half of the year once there is greater clarity around the trading relationship between the UK and the EU.
In France, beyond AXA's mega move for XL, there were no major deals in 2018. There were however a number of investment plays such as the acquisition by AG2R La Mondiale SGAM of 14 property sites from Monoprix SA-Real Estate Assets for around USD 200 million. With the wave of M&A expected in the wake of Solvency II still
yet to materialise, technology remains a key deal driver in France. In one example, CNP Assurances, Europe's third largest life insurer, acquired a stake in fintech company Lydia, France's leading mobile payment solutions provider, with a view to developing new services and targeting new customers across Europe. The Lydia app already has more than a million users, with more than 2,000 new accounts being opened daily.
German acquirors were focused on overseas targets in 2018 nine of the country's 12 deals were cross-border. These included moves by Allianz into the emerging markets of Nigeria, Saudi Arabia and Sri Lanka, and by Talanx into Colombia. Technology is also an increasing priority in one example Talanx invested in start-up Precire, which focuses on artifical intelligence. Looking ahead, in the face of competition from insurtech companies, many traditional insurers may opt to specialise in order to remain competitive in the market, selling off parts of their business that do not fit into this new strategy.
Volume of deals in Europe Jan 09 - Dec 18
Most active countries 2018
by number of deals
0 25 50 75 100 125 150 175 200
H1 144 H2 138
H1 119 H2 98
H1 87 H2 98
H1 85 H2 69 H1 54 H2 60
H1 79 H2 55
H1 61 H2 65
H1 77 H2 74
H1 53 H2 65
H1 59 H2 63
Stagnating premiums, the rise of insurtech and increasing digitisation are key forces driving transactions in Germany. Meanwhile, with experience showing that weaker market sectors have been ripe for M&A, we expect an increase in deals in the run-off market and the life insurance sector.
Kathrin Feldmann, Dusseldorf
The economic downturn has led to a number of expats leaving the region, which is impacting insurers in terms of removing skilled manpower. For the first time, we are starting to see exits from the insurance and reinsurance sectors as internationals seek to redeploy capital, and insurance books being put into run-off.
Peter Hodgins, Dubai
Winds of change set to blow across Middle East and Africa
The Middle East and Africa continue to see little in the way of M&A. The stand-out deal in the region in 2018 was South Africa's biggest insurer Sanlam Ltd acquiring Moroccan insurer SAHAM Finances for USD 1.0 billion. AXA's move for Emirates Retakaful in the UAE for an undisclosed fee was also noteworthy. However, there are signs that deal volume will increase, with regulation a key driver.
In Saudi Arabia, new rules proposed which would require significantly increased capital for re/insurers are intended to drive consolidation. While in the UAE, which has just passed the first-year anniversary of its new risk-based capital regime, prudential requirements for foreign branches have been clarified. The result is a significant increase in the amount of capital that must be held onshore, which is causing some to rethink their positions in the country and may result in exits.
The new South African Insurance Act, which came into force in July 2018, introduced Solvency II-style rules, which have increased insurers' capital requirements. The pressure is mounting on some insurers and we expect the result will be an increase in businesses put up for sale and/or being consolidated.
The Insurance Act has also introduced a legal framework for the prudential regulation and supervision of insurers that promotes broad-based transformation of the insurance sector, and financial inclusion, which has raised challenges around company ownership, with the government wanting more than 25% of the ownership of insurers to be in the hands of previously disadvantaged individuals. Some are choosing to exit the local market to look for investment opportunities in Australia and Europe, or to merge into a larger international business. In a possible sign of things to come, in June 2018, South Africa's Outsurance Holdings took a share in Australia's Autoguru.
The new ownership rules and the introduction of higher capital requirements through Solvency II-style rules will lead to increased M&A activity in South Africa.
Ernie Van Der Vyver, Johannesburg
Volume of deals in MEA Jan 09 - Dec 18
Most active countries 2018
by number of deals
United Arab Emirates
H1 10 H2 4
H1 10 H2 13
H1 12 H2 7
H1 9 H2 4 H1 3 H2 8
H1 9 H2 16
H1 12 H2 11
H1 11 H2 2
H1 8 H2 3
H1 4 H2 4
10 15 20
Spotlight on: Emerging growth strategies
In their search for growth, re/insurers are increasingly looking further up and down the value chain for potential targets. Having decided that alternative capital is here to stay, some are moving into the insurance-linked securities market.
Mitsui Sumitomo recently made a majority acquisition of ILS fund manager Leadenhall Capital Partners, while AIG, AXA and Allianz have all set up or purchased ILS businesses in the past year. Others are looking at managing general agents (MGAs) to enhance distribution. Meanwhile, insurtech start-ups remain attractive targets in multiple markets whether as an efficiency, knowledge or customer access play.
But a transaction is not the only option and the search for growth is driving a number of other trends. Re/insurers around the world are taking an increasingly holistic approach to delivering on their growth ambitions. There is a desire to have an offering that is more flexible and adaptable in the face of a shifting risk landscape.
To achieve this, a number of larger global re/insurers including Swiss Re and Berkshire Hathaway have broadened their offering to offer direct insurance.
Others, such as Munich Re, are looking at how they maximise the data they hold to offer new risk management services based on technology solutions. Access to this technology may be via a takeover or some type of partnership with an innovative start-up that has the right data scientists and models to better analyse data. But this is the tip of the iceberg insurtechs worldwide are carving out niches for themselves in every segment of the market and at every stage of the insurance value chain.
At the same time, we are seeing a narrowing of the gap between capital and risk. Over the past couple of years, rather than move to acquire an existing MGA, there has been a rise in the number of reinsurance-focused MGAs being set up, which offer an efficient and nimble way to extend distribution or write new lines of business. As the pressure to deliver solid returns in a challenging market persists, re/insurers will continue to look at every available growth strategy.
*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
J452792- February 2019