Slew of megadeals lifts deal value in global insurance market

The number of mergers & acquisitions in the global insurance industry hit 84 deals in the first six months of this year, down significantly on the 107 deals noted in the same period for the two years previous. Deal value however was up €37 billion, driven by a slew of megadeals which pushed value to its highest first-half total since the financial crisis. 

The first half of 2018 has seen a wave of megadeals in the insurance industry, resulting in a record-breaking H1 deal total, according to a joint report by Willis Towers Watson and Mergermarket. Up to the end of June this year, there were 14 deals with a transaction value of above €500 million – the same as in the whole of 2016. The year kicked off with US giant AIG’s purchase of reinsurer and specialist insurer Validus Holdings for €4.5 billion, and in March, in the biggest deal of the year so far, AXA purchased Bermuda-based global property and casualty insurer XL for €12 billion.

According to Fergal O’Shea, a Senior Director at Willis Towers Watson, the changing nature of business models is the key driver behind the surge in deal value. “Insurers from all subsectors are realising there are new ways of gaining market share, diversifying income streams and tackling new sectors. Meanwhile, technology is becoming an ever-threatening presence, which incumbents need to acquire if they are to see off insurance insurgents. As a result, strategic acquisitions and disposals are still front of mind in most boardrooms, with confident, cash-rich players eager to grab a piece of the action.”

Changes in the regulatory space have also had a large impact on the M&A strategy of insurance companies. The implementation of Solvency II is such an example, with higher capital adequacy norms sparking some players to strategically change their ambitions. In Europe, those most affected by Solvency II have included long-term life insurance businesses and those offering long-term savings and guarantees. “In practice, this has meant companies divesting non-core assets,” explained O’Shea. In February, UK-based asset management firm Standard Life Aberdeen announced to shareholders that it would offload its entire life assurance business to Phoenix Group for a cash and shares deal worth £3.24 billion. 

The move was followed in March by one of the UK’s largest insurers, Prudential, “demerging” its investment arm and offloading £12 billion of its annuity book to specialist pension insurer, Rothesay Life. After the separation, which is scheduled for completion by the end of 2019, there will be two listed companies: M&G Prudential, which is set to be “an independent, capital efficient UK and Europe savings and investment provider”, and Prudential, “a leading international insurance group focused on high growth opportunities in Asia, the US and Africa”. Both will be listed in London.

Another regulatory theme that may have been at play too, according to Joe Milicia, a Director at Willis Towers Watson, is tax reform in the US. “The new taxation has provided an immediate boost to US company earnings since the turn of the year, and that means US insurers instantly became more attractive to foreign insurers who see the potential to earn more from the US than had been available before.”

Meanwhile, private equity investors have played a role in orchestrating megadeals in insurance. With dry powder levels at a record breaking level of over $1 trillion in 2017, the private equity sector has driven interest in assets and been involved with several complex acquisitions in the past months. From a regional perspective, a growing trend of foreign investment from Asian companies is observed, as Asia’s leading firms look to grow their geographical footprint and acquire core and innovative capabilities. 

On the back of larger and more complex deals, the researchers found that the phase to deal execution has increased. “We’re seeing a much longer stretch of time from announcement to closing,” said Jack Gibson, Managing Director at Willis Towers Watson.

However, despite the upturn in deal value, deal volume figures highlight a different trend in the first six months of 2018. Just 84 deals were announced – the lowest number since 2009. “Increased competition on many deals, complex acquisitions that split companies into many parts, and another challenging hurricane season have all combined to make dealmakers more cautious in their approach,” highlighted Milicia. 

Looking ahead, O’Shea said that with debt remaining cheap and geopolitical concerns having less impact on insurers than on other service sectors, 2018 could still see the industry beat its own record of 34 megadeals announced last year. “We will continue to see an active M&A market, it’s just a matter of paying the right price and overcoming the hurdles.”