M&A Activity Moving Offshore
As with many other aspects of economic activity, mergers and acquisitions are moving offshore.
The historic domination of the United States in terms of the overall share of M&A activity in the insurance industry has slipped, as Europe moved into the front-runner position in the volume of transactions completed, according to the latest report from international law firm Clyde & Co.
The United States’ dominion in M&As is “an entirely natural consequence given the size and maturity of the world’s largest re/insurance market,” the report noted.
However, in the last 12 months, there has been a reversal. From July 2013 to June 2014, there were 139 transactions in Europe, up from 123, while in the U.S., there was a drop from 113 to 97.
Doug Maag, a New York-based partner of the firm, said: “Contributing factors to this downward trend in the U.S. appear to include differing buyer/seller perceptions of company value, ongoing regulatory uncertainty, the uncertain economic outlook, and some company’s preference to reinvest excess capital into the business or to satisfy shareholders with stock buybacks and dividends”
The reversal may not be a long-term trend, Maag said.
“It remains to be seen whether Europe will retain that lead, of course, particularly given regional challenges posed by unrest in Ukraine and sanctions against Russia,” he said.
The U.S. has its own set of challenges, Maag said.
“Questions continue about the durability of the global economic recovery,” he said. “Private-sector uncertainty is a natural byproduct of the political logjam in Washington, which has now persisted for a very long time.”
Also, some insurers have to worry about the prospect of being designated as a Systematically Important Financial Institution (SIFI), he said.
“Large insurance companies that do not qualify for SIFI designation now may, by virtue of an acquisition, change their profile in a way that causes them to become so designated,” Maag said. “If that happens, the insurer becomes subject to heightened levels of supervision and regulation, and possibly to enhanced capital requirements.”
But on the positive side, it could all change, and quickly, Maag said.
“With a single quarter of particularly bright economic indicators or a meaningful breakthrough in the political logjam, risk appetite could return with a vengeance,” he said. “I do think this will happen but the question is when.”
“GDP growth is particularly critical in stimulating or dampening M&A,” Maag said. “The consistent rise in the U.S. stock markets over the last 12 months may lead firms to conclude that valuations are back at levels at which they would consider sale, and, therefore, increase the number of management teams willing to consider an offer,” he said.
The faster than expected growth in U.S. GDP in the second quarter of 2014 may also signal a return to a macro-economic environment that could stimulate expansion through M&A, he said.
Looking for Returns
Probably the most powerful trigger for M&A activity in the coming year is the excess capital overhanging the sector, said Andrew Holderness, global head of corporate insurance for London-based Clyde & Co.
“In the absence of a catastrophic event causing significant balance sheet damage, and with rates having trended downward steadily over the last couple of years, re/insurers have become even more active in their search for alternative strategies.” — Andrew Holderness, global head of corporate insurance, Clyde & Co.
“Shareholders are looking for decent returns on their investments and, if management cannot deliver this operationally then there will be pressure either to return it or deploy it elsewhere,” said Holderness.
“The key challenge is for those companies that cannot demonstrate underwriting excellence or are unable to scale up and move into different markets to acquire new business,” he said.
“In the absence of a catastrophic event causing significant balance sheet damage, and with rates having trended downward steadily over the last couple of years, re/insurers have become even more active in their search for alternative strategies.”
In addition, Holderness said, size appears to be becoming increasingly important — with balance sheet strength seen as being critical to clients, he said.
“If this is the case, then strategic mergers and acquisitions will be driven by the desire to reach optimal scale and relevance,” he said.
Here are highlights of region-by-region reports, based on data supplied by Thomson Reuters financial services.
• Asia Pacific
In the last few years, in contrast to other regions around the world, the volume of M&A activity in the insurance industry sector in Asia Pacific has remained comparatively steady.
This pattern continued from July 2013 to June 2014, with an uptick in deals in the second six months. Overall, across the 12-month period, the number of transactions reached 60, compared to 66 in the previous year and the region accounted for 18 percent of deals on a global basis.
“Government liberalization moves will drive M&A activity in India,” said Vineet Anjela in Clyde & Co.’s New Delhi office.
“Interest in M&A in Indonesia is set to rise,” said Ian Stewart of the firm’s Singapore office. “This is a stand-out market in a region that offers promising growth.”
Dean Carrigan of the firm’s Sydney office noted: “We expect some consolidation in Australia to take place between small independent broking groups.”
• Middle East and Africa
The Middle East and Africa span a range of markets at different stages of development both economically and in terms of the insurance industry.
Overall, the number of insurance industry M&A transactions has risen to 17 in the period from June 2013 to July 2013, compared to 7 in the prior year.
However, while activity in the Gulf Cooperative Council (GCC) has been limited, emerging economies such as Turkey and Morocco have seen a number of deals, and a significant spike in transactions elsewhere in Africa suggests that the insurance industry could be waking up to the continent’s huge potential.
“We are seeing a surge of interest from overseas in starting up reinsurance operations in the Dubai International Financial Centre,” said Dubai-based Wayne Jones of Clyde & Co.
• Latin America
The last year has seen a range of economic and political factors impacting a number of countries in Latin America, many of which could have acted as a brake on M&A activity.
Despite this, the region has seen a spate of deals from July 2013 to June 2014. There were 16 transactions in the period across the region, compared to 20 in the previous 12 months.
“We are seeing Latin America playing with the scale, expertise and ambition to look beyond their national borders for opportunities,” said Sao Paulo-based Stirling Leech of Clyde & Co. “A number of U.S.-based insurers, in particular, are looking to establish or strengthen a presence in the region.”
While the overall volume of deal activity has not increased sharply this year, it is likely the market is reaching a tipping point at which more M&A activity will occur, Clyde & Co. said.