Insurance Deals in Asia Plunge by 51% in the First Half of 2021. How Did the Americas and Europe Fare?
Merger and acquisition (M&A) transactions completed in the first half of 2021 in Asia Pacific tumbled by 51% as compared to the first half of 2020, according to the Insurance Growth Report mid-year update released late in August by Clyde & Co. based in London.
M&A activity plummeted even farther in the Middle East and Africa, but from a much smaller base. Deals completed in the Americas posted a modest year-on-year gain of 7%, while deals in Europe ticked slightly higher at 2%. On aggregate global insurance M&A for the first half of this year was down 3%. That said, many indicators are positive for increases in the second half of 2021.
Asia Pacific saw completed deals fall from 37 to 18 — the lowest level since Clyde & Co. began its report in 2011 — as pandemic and geo-political uncertainty weighed heavily on deal-makers. Japanese acquirers were again the most active compared to 2020, ahead of India and Australia.
The sharp drop in M&A activity in Asia Pacific can be attributed in part to the high regulatory bar in some jurisdictions, Clyde & Co. suggested. Not only do prospective acquirers face higher solvency capital requirements in some markets, but there is a more robust scrutiny of business plans to assess the longevity of new entrants’ interest.
“Regulators are becoming increasingly cautious,” said Joyce Chan, partner at Clyde & Co. in Hong Kong.
“When new players come in and buy a particular insurer in the region, local regulators usually request quite a substantial capital increment as well. The solvency requirement expectation is much higher, acting as a brake on M&A. Conversely, regulatory actions are also making some significant portfolios available to acquirers. In Australia, for example, the knock-on effect of the recent Royal Commission is forcing the country’s major domestic banks to offload non-core lending businesses, which is making some attractive insurance assets targets for acquisition.”
M&A activity is likely to remain subdued until the markets have stabilized after the pandemic when there is greater certainty about the economic outlook. Deal-makers in Asia Pacific remain hesitant, Chan reported.
“Given the cost and effort required to get transactions over the line, insurers are considering a range of growth options. Those include strategic alliances with on-line banks, e-commerce giants, or other on-line retail platforms to access new distribution networks. The managing-general-agent model is likely to expand, especially in the medical insurance sector due to the uptick in middle-class spending coupled with an aging population,” she said.
Outlook in America and Europe
Driven by robust activity in the U.S., the Americas led the way with 116 deals, up from 102, pushing M&A in the region to its highest level since 2015.
Although the collapse of the Aon-Willis Towers Watson merger due to U.S. antitrust concerns means some caution for mega deals, at least in the U.S., M&A activity should otherwise continue to remain on a strong pace, the report suggested.
After a steep drop in transactions in 2020, Europe held steady in H1 2021 with 51 completed deals, up one on the previous six-month period.
The UK was the leading European country – and second most active worldwide behind the US – ahead of Spain and Germany.
Looking to M&A Activity in Africa and the Middle East
After a standout 2020, which saw a total of 32 deals, M&A activity in the Middle East and Africa dropped back with only five completed transactions in the first half of this year. These all involved Middle East acquirers – two from Israel and one each from Egypt, Saudi Arabia and the UAE.
Striking a sanguine tone for the second half of the year, Ivor Edwards, partner and European head of the Corporate Insurance Group at Clyde & Co. noted, “Market hardening is creating organic growth opportunities for re/insurance carriers, but the availability of cheap liquidity, active interest from private equity investors and strategic re-underwriting of portfolios at larger carriers signal that an uptick in M&A is likely.
“The extent of that increase will vary by region and investor sentiment – deal-makers in the US are comparatively bullish whereas their counterparts in Asia-Pacific remain more cautious as they wait for a more positive economic outlook,” he continued.
There were 11 deals worldwide in the first half of 2021 with an aggregate value of greater than $1 billion. That is in contrast to 15 deals in the whole of 2020, including the largest of the period, the sale of UK-headquartered RSA to Regent Bidco for $9.2 billion.
The Road Ahead
In addition to the rise in big-ticket transactions, in a sign of a bifurcated market, there is an increasing number of more modest strategic divestments from carriers looking to focus on their core business as part of a long-term strategy.
“We are seeing a lot of legacy books being sold off or prepared for sale,” said Vikram Sidhu, Clyde & Co. partner in New York. “The sellers tend to be companies trying to clean their balance sheets and free capital.”
Separately, the first half of this year saw technology investments into a variety of businesses around the world including deals focusing on coverage to homeowners in catastrophe-prone regions, on-line insurance comparison platforms, and digital healthcare.
“Many start-ups have matured to the point where they have a proven business model and a robust balance sheet, which makes them very attractive to buyers,” said Eva-Maria Barbosa, a partner at Clyde & Co.’s office in Munich. “At the same time, the absence of sufficient technology investment on the part of a seller can be a deal breaker – potential acquirers can be put off if they think they need to spend millions to make a target company’s IT systems fit for purpose.”
Activity in the U.S. seems to be accelerating.
“The post-pandemic outlook is very positive,” Sidhu said. “Even weak sectors have been rebounding and the concerns of the last year have been receding–albeit tempered by a rebound in COVID cases due to the Delta variant–bolstering investor sentiment. We expect M&A to remain at a high level for the remainder of the year and into 2022.”
It may also be that Europe is ready for an M&A re-set. Although deal activity in Europe has continued steadily at a comparatively low level for a couple of years, there are signs that some of the region’s structural issues are being addressed, according to Barbosa.
“The high number of life insurers and composite carriers facing stringent capital requirements make these businesses unattractive to potential acquirers,” she noted.
“While companies looking to build scale in their non-life book through M&A have to solve the conundrum of what to do about their life operations before seeking a merger partner. Some larger carriers are looking to exit the life market to improve their balance sheets, with the bulk of life business divestments expected to end up in the run-off sector.” &