Global insurance M&A activity set to soar in 2021

Increasing premium rates and a more optimistic outlook for most lines of business will make stronger market players more likely to look for growth opportunities through acquisitions, some of which may have been put on hold in 2020 due to the COVID-19 pandemic, according to Clyde & Co’s insurance growth report.

The new report predicts that despite the economic uncertainty and heightened deal scrutiny, insurance mergers and acquisitions (M&A) will surge in the first half of 2021.

The number of completed deals globally are likely to surpass 220 in a six-month period for the first time since 2019 and could go even higher in the second half of the year.

“Deal-makers’ appetites have returned, buoyed by growing confidence in the economic outlook and the sense that there are opportunities to be had," according to Ivor Edwards, head of Clyde & Co's European Corporate Insurance Group. "Despite market hardening, many of the fundamentals driving M&A will persist. These include competition for assets, the need to diversify portfolios, add digital capabilities, and increase scale and market share."

Edwards added: "The availability of plentiful capital, combined with a deeper pool of targets, will give buyers plenty of choice although we expect them to select acquisitions carefully to ensure the best fit with their strategic objectives.”

The report noted that the improving market conditions have seen insurers raise capital and also attract more funds into the industry including from private equity, which will help finance more M&A deals.

Eva-Maria Barbosa, a partner at Clyde & Co’s Munich office, explained: "The involvement of PE giants Kelso and Warburg Pincus as part of Arch’s deal to acquire Watford Re is just one example. In addition, with interest rates at historic lows, buyers may look to tap cheap debt or deploy cash stored away during the pandemic to fund acquisitions.

"Meanwhile, the trend of new players entering the re/insurance market, often backed by an established figure with a proven track record capable of attracting significant financial backing, is set to continue.”

Analysts at Clyde & Co also highlighted that technology will be a primary deal driver in 2020 and beyond as insurers look to insurtech providers that can deliver a competitive edge, be it through acquisition, investment or partnership.

It noted that the pandemic has accelerated the adoption of technology across the insurance industry, underpinning deals of every size. And, examples of insurers taking stakes in insurtech start-ups increased across all geographies.

The report also suggests that appetite for bigger deals is returning. However, the coming year will see a widening pool of assets of all sizes becoming available to acquirors.

“The pandemic has forced insurance businesses to review their strategies and get especially focused on which products they want to be underwriting and in which markets. A number of firms are actively pursuing opportunities to exit certain non-core businesses through restructurings, divestitures, and other deal activity, including to free up capital to redeploy to more preferred areas and products in the hardening market. As a result, legacy transactions will continue to grow and will be a feature of the market in the coming year,” said Vikram Sidhu, a New York-based Clyde & Co corporate insurance Partner.

Clyde & Co investigated M&A trends in the global insurance sector and found that the deal volume fell in 2020 compared to the previous year, but it rose slightly in the second half of the year. At the same time, the deal size dropped in 2020 with 25 percent fewer ‘megadeals’.

The Americas remained the most active region for M&A, up 6 percent on 2019. Asia Pacific saw a 9 percent rise with M&A accelerating through the year. The Middle East and Africa saw the biggest gains in percentage terms, albeit from a low base, up 167 percent from the previous year. In contrast, activity in Europe was down by almost a third year-on-year.

Edwards said: “Insurance transaction activity worldwide belied expectations in 2020. Deal-makers in the insurance industry, like many others, paused for reflection in the first half of the year, but not for long. Strategic players in the market and M&A specialists clearly did not want to be relegated to the side lines and quickly regrouped to identify and pursue opportunities."

Edwards concluded that "with deal announcements continuing apace, we expect the level of completed M&A in the coming months to accelerate as re/insurance businesses scent opportunities to build scale, generate efficiencies and reach new customers in new markets.”

Did you get value from this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.