Recent months has seen merger and acquisition (M&A) activity begin to revive from the low levels that have prevailed since the 2008-09 global financial crisis, reports Swiss Re.
In its newly-published
‘M&A in insurance: start of a new wave?’
, the reinsurance group reports that there were 489 deals completed globally in 2014, although this is still well below the total of 674 in 2007.
Swiss Re adds that the recent M&A upswing is largely concentrated in certain sectors, such as specialty re/insurers and insurance intermediaries, while consolidation is a response to the squeeze on middle-tier specialist re/insurers.
It expects regulatory changes, alternative investors, globalisation and access to distribution technology to stimulate further M&A deals.
After declining sharply in 2009, overall M&A activity in the insurance sector remained relatively subdued. However, in recent months activity has picked up again, while the pipeline of future deals has also increased: total M&A announcements in the second half of 2014 rose to 359 from 295 in H1, and this momentum continued into 2015.
Survey evidence also indicates that sentiment towards M&A is turning as confidence about the economic outlook gradually improves and market participants look to acquisitions or mergers to boost profitability as well as bolster their balance sheets.
The report notes that key themes in insurance M&A transactions include divestments of closed blocks and run-off operations. Such disposals can be an effective way to achieve an early exit from business in run-off so that capital may be redeployed to new or expanded lines of business. There has also been more activity in the specialty re/insurers sector as incumbent firms respond to heightened competitive pressures.
The emergence of alternative risk-absorbing capacity from hedge funds, investment banks and pension funds has put downward pressure on prices in some property and casualty lines, prompting some specialist re/insurers in Bermuda and Lloyd’s to combine their operations to take on wider and emerging corporate risks and reduce operating costs.
“What’s happening, is a squeezing out of the middle-tier specialist re/insurer,” said Kurt Karl, Swiss Re’s chief economist. “Some firms do not have the scale or the breadth of services to differentiate their offering from more commoditised reinsurance capacity.
“Going forward, we expect to continue to see a certain shakeout in the sector as companies join together in search of revenue and cost synergies.”
Beyond the specialty re/insurance sector, there have also been strategic deals to expand expertise, distribution capabilities and geographical reach.
M&A activity has increased in the emerging markets (EMs), particularly Asia Pacific and Latin America, with advanced country insurers continuing to focus on expansion in high growth markets. Increasingly too, emerging market insurers are eyeing acquisitions in advanced markets as a way to diversify geographically and across business lines.
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