Insurance M&A plunges in H1

Insurance industry mergers and acquisitions (M&A) are spiralling downwards with only 170 deals in the first six months of 2017, compared to 186 in the preceding period.

Activity is now down 24% from its recent high in H1 2015 when there were 225 deals, according to the Clyde & Co’s mid-year growth report.

M&A activity in Europe is down 28% in the last six months, partly due to the distraction of Brexit.

Completed M&A deals in Asia Pacific fell to 22 from 36 in the second half of 2016, partly because of temporary monetary controls in place in China.

The Middle East and Africa saw slight growth in M&A, albeit from a low base, with eight deals compared to just two in the prior period.

Deal activity also grew in the Americas, with 86 transactions so far this year, compared to 81 in the preceding six months.

The impact of regulation

However, insurers are exploring other avenues for business growth.

The capital rules underpinning Solvency II regulation have led insurers to put certain books of business up for sale, with industry heavyweights such as Prudential recently putting a £10bn block of annuities on the market.

“For the finance team specifically, a key challenge when selling off a book of business is being able to model the outcome across a number of different aspects, including the impact to earning profile, ceded premium, reinsurance treaties and reserves required, through to the financial statements of the legal entities affected,” says Simon Bittlestone, managing director of financial analytics firm Metapraxis.

“To model effectively, the finance team will want to see the numbers in the context of the organisation’s historical data, and consider which trends appear within any particular part of the written business,” he says.

As insurers continue to react to the ever-changing world of Solvency II, treasuries need to plan for the impact this regulation does, and could continue to have on their business.

“Many businesses undertake ad hoc analysis on their books of business as opportunities or requirements to divest their portfolio arise, and the insurance sector is no different. These analyses can be difficult for others outside the modelling team to understand and to help refine, which can lead to less-than-optimal deals,” says Bittlestone.

“The best-prepared insurance companies invest in modelling tools that place their analyses in the context of historical, actuals and planned financial metrics. Furthermore, their finance teams are able to share the analyses with other stakeholders, such as heads of lines of business, to engage them with the deal at hand,” Bittlestone continues.

Andrew Holderness, Clyde & Co global head of the Corporate Insurance Group, says: “Uncertainty is the enemy of deal-making. M&A has risen in the Americas now that the uncertainty that plagued the market in the run-up to the US presidential election has eased somewhat.

“However, in Europe, uncertainty persists with Brexit acting as a significant brake on M&A activity. Transactions have been overtaken on the corporate agenda by Brexit preparations as companies realise that there is no time to lose.

“Elsewhere in Europe political and economic uncertainty in markets as far apart as Greece, Italy and Russia continue to weigh heavy on investor sentiment,” says Holderness.

Despite the drop in deals, Holderness remains optimistic, arguing the M&A is still an attractive way for a business to create value.

“While insurers continue to consider all the tools at their disposal in the quest for growth, there is good reason to expect that more M&A will get over the line in the coming six months,” says Holderness.

“Hot-spots for deal making are likely to include China where the regulatory environment is expected to ease, allowing a pent-up wave of M&A activity to resume, while overseas expansion as evidence,” he adds.

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