Scaling up—M&A in the reinsurance market

After a three-year slide, mergers and acquisition (M&A) activity in the re/insurance sector appears to have a sense of renewed energy—with a small increase in the number of deals completed in the first half of 2014 (see Figure 1).

Probably the most powerful trigger for M&A activity in the coming year is excess capital. Shareholders are looking for decent returns on their investments and, if management cannot deliver this operationally, then there will be pressure either to return it or deploy it elsewhere.

Regional readjustment

There has been a significant regional shift over the last year. Historically, the US has dominated in terms of overall share of transactions, but Europe has now taken pole position. Contributing factors to the comparative inactivity in the US include differing buyer/seller perceptions of company value, ongoing regulatory uncertainty and mediocre economic performance.

Across the Asia Pacific region, levels of deal activity have been relatively stable. However, this probably underestimates the level of interest in the region, which remains keen, with global re/insurers, regional players and private equity houses all looking at the growth potential.

Increasingly re/insurers from developing economies are looking to expand their businesses in the more mature markets. The acquisition of Antares’ Lloyd’s business by the Qatar Insurance Company and Brazil’s Grupo BTG Pactual SA’s plans to buy reinsurer Ariel Re both show a desire to expand outside of the local market.

Size also appears to be becoming increasingly important, with some saying that between $5 billion and $8 billion in capital is required to be really relevant. If this is the case, then strategic M&A will be driven by the desire to reach optimal scale and relevance.

Attention now turns to who might be next for acquisition, with the focus clearly on the smaller players.

Andrew Holderness is the global head of Corporate Insurance at Clyde & Co. He can be contacted at: andrew.holderness@clydeco.com