Drinker Biddle and Reath predicts shift to vertical M&A activity in 2019/20

Mergers and acquisitions (M&A) activity will continue for 2019, and into 2020, particularly in light of interest rates and abundant capital in the market, Parimah Hassouri, partner at Drinker Biddle and Reath, told Monte Carlo Today.

“We expect the activity this year to be up and down the vertical—as opposed to the horizontal integration we saw last year with AXA and XL and AIG and Validus—with insurers acquiring insurance agencies, brokers and managing general agents, established carriers and venture capitalists investing in insurtech, and private equity (PE) firms continuing to invest in the sector,” Hassouri said.

She said that agency and third party administrator acquisitions continue to be a strong focus for PE firms, given the predictable cash flow, reasonable margins and the ability to grow and scale them.

“Scaling is a key factor as these investors seek to achieve cost synergies and efficiencies and experiment with different ways to utilise distribution platforms,” she said.

Insurance regulators have been sceptical of these investors in the past, Hassouri commented, because their returns are typically achieved through financial restructuring and operational improvements.

“However, regulators are slowly becoming more comfortable with PE firms and the fact that they are not focused solely on making quick profits and putting policyholders and annuity owners at risk with aggressive strategies,” she explained.

Non-traditional players such as large retailers, social media and e-commerce platforms, and manufacturers of goods, will continue to enter the market.

“It is definitely still a soft market, and the amount of capacity in the market continues to expand with new entrants coming in and existing players expanding their underwriting guidelines and entering into new areas and new lines of business,” she said.

Hassouri highlighted the low interest rate environment—paired with a few very active years of natural catastrophes—as the ongoing trend “continuing to push an increased focus on underwriting returns and underwriting discipline in the direct and reinsurance markets”.

“This is particularly relevant for reinsurers, which traditionally rely on investment income to replenish their capital when cat events occur; for them underwriting profit is particularly important,” she concluded.