2019 Insurance M&A outlook: Positioning for growth

Article Synopsis :

Deloitte anticipated growth in the deal flow for insurance M&A. Though it expected a couple of large $5 billion deals, most were thought to be in the sub $2 billion regions.

Big numbers in insurance M&A 

This was how the market played out with good performance across deal volume, aggregate deal value, and average deal value. Though there were only 87 recorded transactions in 2018 against 84 the previous year, aggregate deal value increased by 189% from $15 billion to $43 billion.

Where did that come from?

Behind this massive surge were two major property and casualty (P&C) deals. The first was Axa’s $15.3 billion acquisition of Bermuda-based XL Group to create the largest global P&C commercial lines insurer on gross written premiums. The other was American International Group’s (AIG) $5.5 billion acquisition of Bermuda reinsurer and specialist insurer Validus. There were a number of other interesting deals that had private equity companies interested as well.

Life and health M&A deal volume saw a 16% drop over 2018 yet the aggregate deals increased. Of the four deals anticipated to exceed $1 billion, only three were announced. However, two of these ended up being in excess of $2 billion, continuing the upward trend from 2016.

Increasing interest rates makes life and annuities insurers more attractive and there may be more financial rather than strategic investors in the coming year.

It was also a record year for insurance brokers deals in 2018, with 594 transactions announced. Aggregate deal value increased by 50% on the previous year, as a result of the Marsh & McLennan/Jardine transaction. The average deal value also increased by 26% from $194 million in 2017 to $245 million.

The acquisition is clearly a strategic play for some. Five companies announced more than 20 acquisitions throughout 2018.

The coming year

Provided there isn’t a major catastrophe (P&C), falling interest rates (L&H) or excessive stock market volatility, or the early onset of an economic downturn, things will continue much as they did last year.

Private equity investors seem to like insurance entities and the rising interest rates make life and annuities more attractive.

Continued soft rates might result in larger P&C acquisitions in 2019 in order to diversify, grow market share, or simply break into niche sectors. Midsized reinsurance companies remain a target, as do smaller companies running personal lines, and niche speciality companies.

Insurtechs that can provide larger insurers with plug and play functionality are also in demand.

The transactions will fall within five areas:

• Cross-border deals. US-based insurers flush with cash from the tax reforms may snap up Bermuda-based companies that are struggling under the new US tax laws. Asia may be targeted by US buyers and Canadian life companies. The US may experience its own M&A bubble, as companies seek to diversify against overexposure in their home market. But they won’t come cheap and so Japanese companies will lead this charge.

• Middle-market match-ups. Middle-market personal lines and small commercial insurers are no longer content to stick to what they know and see that insurtech has altered the customer relationship narrative. This means scale is important but as many of these companies are mutuals, instead of roll-ups, there will be many more alliances formed. Some are creating upstream holding companies to allow greater flexibility over how they use capital to buy other companies and invest in insurtech.

• Portfolio optimization: Insurance companies will likely continue to be interested in acquiring businesses that diversify their product portfolio and customer base; smaller, high-performing speciality businesses that provide bolt-on opportunities are likely to sell at a premium:

• InsurTech imperative: Insurtech investments should remain strong in 2019, as many would prefer to buy rather than build industry-disrupting capabilities to drive market growth and improve long-term financial performance. New venture capital (VC) funds – some within insurance companies – are making partial investments with a view to full-on acquisitions of successful startups. As PE and VC investors are seeking to liquidate maturing holdings, there should be plenty of investment opportunities.

• Private equity participation: PE firms, as well as sovereign wealth funds, pension funds, closed-block specialists, and special purchase acquisition companies, have been expanding their portfolios. Competitive buyers will continue to seek deals and the reinsurance sector appears to offer opportunities for its mix of good yield, better interest rates, and relative safety.

The report finishes with nine do/don’t tip for those considering M&A in 2019.

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