26 December 2016Insurance

M&A key for re/insurers in 2017, but lack of targets and price will slow activity

Reinsurers and insurers are set to seek growth through acquisitions in 2017 in order to diversify and gain required scale to excel in a challenging environment. However, they are likely to face difficulties in finding appropriate targets.

Fitch expects M&A activity in the insurance market to continue in 2017, but not at the relatively high levels seen in 2015/16.

Aggregate deal values of insurance M&A activity jumped 238 percent year over year in 2015, to $67.6 billion, driven by property/casualty, according to Deloitte’s 2016 Insurance M&A Outlook. This makes it the most active year ever for M&A across all insurance industry sectors. (Click  here for full feature)

“We have seen a wave of M&A transactions in 2015 that partly paused in the first half of 2016 before gaining momentum again in the third and fourth quarter in 2016 in the re/insurance space,” Johannes Bender, Taoufik Gharib, and David Masters, credit analysts at S&P Global Ratings, told Intelligent Insurer.

“We believe consolidation will remain a potential solution for reinsurers looking to strengthen their competitive positions, smooth concentrations and to bolster balance sheets,” said S&P.

Cost synergies become increasingly relevant in the soft cycle, and M&A can be an effective measure to achieve that goal, the analysts explained.

“There was a dip in M&A activity in 2016, partly due to a natural cooling down in a market that hit a three-year high in the first half of 2015 and challenges in finding the right target at the right price, said Andrew Holderness, global head of corporate insurance group at law firm Clyde & Co.

Chris Waterman, EMEA head of insurance at Fitch, said that the key factors driving insurance M&A are unchanged, such as the need for scale, capital optimisation, expense management, constrained profitability and limited growth opportunities.

At the same time there is continued demand from investors within the industry to consolidate, and from outside players looking for uncorrelated income streams, Waterman added.

“We expect to see continued interest in developed insurance sectors from investors in Asia Pacific, particularly China and Japan, looking to develop international platforms, as well as from alternative capital such as pension funds and private equity,” Waterman said.

Despite significant demand for M&A, companies looking to grow via acquisitions may face a few challenges in 2017.

“M&A activity will continue, but probably less than we saw in 2015, simply because there are now fewer targets,” said Paddy Jago, global chairman of Willis Re.

In addition to a lack of appropriate acquisition targets, high prices may also discourage some companies from making an offer.

Over the last couple of years, exit book values have continued to rise but international acquirers seem able and happy to acquire businesses at more than twice book value, whereas even two years ago, the multiple was between 1.0 and 1.5 times, said Jeremy Brazil, director of underwriting at Markel International.

“While these valuations seem pretty hairy to those of us who have been around the industry for some time, some buyers still seem to think that as long as they can grow their top line, they will be able to create efficiencies and take out cost,” Brazil said. However, “the history of M&A doesn’t always support that approach,” he noted.

“We predict that in 2017 M&A will remain a popular route for companies looking for consolidation, diversification and geographic reach,” Holderness said. But he also expects increasing interest in other routes for growth, such as the establishment of a branch or subsidiary in a new market.

In total senior executives from companies including Swiss Re, Argo, AM Best, Moody’s Markel, Advent, Barbican, Brit, Ed, Fitch, S&P Global Ratings and Willis Re participated in the piece looking forward to 2017. To read the full transcript of their thoughts and comments, please click  here.

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