Global insurance M&A up but COVID-19 uncertainty to bring lull in 2020, finds report

Mergers and acquisitions (M&A) activity in the global insurance industry rose in the first half of the year, but the trend is likely to tail off in the remainder of 2020 due to the impact of COVID-19 and the mixed outlook for recovery depending on the length and depth of the recession.

According to Clyde & Co’s mid-year insurance growth report, a total of 201 M&A deals were completed worldwide in H1, up from 197 in the second half of 2019. This was only the second six-month period in the last five years where the volume of transactions exceeded 200.

However, the first half of 2020 saw a slowdown in mega deals, with just six valued at over $1 billion, compared to 20 in the whole of 2019, evidence of a more measured approach to deal-making that is expected to continue.

The M&A activity was flat in the Americas, down in Europe and up in Asia and the MEA region.

The deals in the US dropped from 73 to 64, marking the third consecutive period of decline.

Asia Pacific saw an uptick from 31 to 38 deals in the first six months of the year, with Japanese acquirors leading the way, ahead of Taiwan and South Korea.

The shadow of Brexit combined with difficulties in reaching agreement on valuations pushed M&A in Europe to a three-year low with 53 deals completed, down from 67 in H2 2019.

Ivor Edwards, partner and European head of the Corporate Insurance Group at Clyde & Co, said: “The deals completed in the first half of 2020 would have been negotiated and agreed back in 2019, pre-pandemic. The impact of Covid-19 on insurance M&A will only become clear in the coming months and we expect it to be stark in the short-term. For many, responding to the pandemic has meant putting growth ambitions to one side, in order to take stake stock of the impact on operations, claims and investment returns. The last few months have been plagued by a level of uncertainty – the enemy of deal-making – rarely seen before. This will be reflected in the number of completed deals in the second half of the year. But as the economy moves towards a state of stability that could be defined as ‘the new normal’, opportunities will arise and we expect re/insurance transactions to make a comeback in 2021.”

Capital raising has been a feature of the post-pandemic market – reaching $16 billion in H1 2020 - according to Willis Towers Watson – presenting opportunities for organic growth that could depress appetite for M&A.

Edwards explained: “COVID-19 has accelerated the market hardening that was already underway and re/insurers are keen to write more risk at a higher price but need to offset losses from Covid-19 in order to do so. As rates rise there is also the potential for a wave of new start-ups and scale-ups, as we have seen in the aftermath of other major loss events in the past, albeit the situation now is more nuanced than post Hurricane Katrina, for example. That has not deterred a range of market figures from exploring options and there has been a succession of headlines around early-stage start-up plans.”

Vikram Sidhu, Clyde & Co partner in New York, said: “Strategic and financial buyers had already begun to place heightened focus on deals that really make sense for them, which is a trend that will accelerate in the fallout from COVID-19. As the pandemic continues, we will see a range of distressed businesses as well as re/insurers pulling out of certain lines, industries or geographies. Those looking to rationalise their operations will move to divest divisions and books of businesses that do not fit with their core strategy or their financial goals. In 2021, we expect an increase in the number of such businesses being offered for a sale and a greater interest in legacy business that could lead to a burst of deal activity.”

Joyce Chan, Clyde & Co partner in Hong Kong, highlighted that technology will be the primary growth driver of deals worldwide. “While insurtech investment dived in Q1 due to Covid-19, it rebounded in the second quarter. Although investors have already become more selective since last year, a trend that the pandemic will strengthen, high-quality tech offerings are still attractive, provided they can prove their worth," said Chan. "Start-ups now reaching maturity with a proven track record are ripe for acquisition and we expect this to be a key deal driver in H1 2021.”

Edwards stated that the "outlook for Europe is mixed and will depend on the length and depth of the recession. We will likely see European banks and insurers looking to dispose of non-core assets that will generate a pool of targets for acquirers, but limitations on capital will prevent some general insurers from making acquisitions. At the same time, insurers from less mature markets may sense an opportunity to establish or strengthen a presence in Europe, possibly at a favourable price.”

Sidhu said: “The US insurance M&A activity had already been slowing down before the pandemic began. After a sustained period of deal-making, valuations had risen and some investors had been pausing to take stock. Others had been wary of geo-political tensions, particularly with China, and the upcoming US election had added another layer of uncertainty. The pandemic has added to that slowdown, although deal activity continues. Going forward, deal-makers will continue to look for attractive opportunities, although the time taken to reaching a deal is likely to be longer than normal for the foreseeable future.”

Chan added: “In the short to medium term, re/insurers in some markets in Asia Pacific are under pressure and still working out the impact of COVID-19 on their operations. As margins become further squeezed, they will be re-evaluating their strategies and looking to redeploy resources to where they will be most profitable, which may lead to exits from certain jurisdictions or lines of business. Further out, we expect an increase in activity in China where new regulations to facilitate consolidation and inbound investment are in place but yet to be tested, while the possibility of a link between the Greater Bay Area and Hong Kong could offer an alternative route into China for foreign investors.”