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After something of a pause, the start of 2018 has brought several big M&A deals with the potential to transform the Bermuda market. In this special report, we assess the driving forces underpinning existing and future deals and ask a number of the Island’s best known dealmakers for their views on what more we can expect.
2018 has started with a burst of mergers and acquisitions (M&A) activity that raised the eyebrows of more than a few people. In March, XL Group was bought by French insurer AXA Group for $15.3 billion, while in January Validus was snapped up by AIG for $5.56 billion.
The recent activity has come after something of a hiatus in 2017, after earlier activity in 2016 and 2015, with the latter including the highly contested Axis-PartnerRe-Exor battle. The reasons behind this hiatus were hotly debated.
“We’ve stated in many previous reports that M&A is one of those things where the conditions have been ripe for quite some time,” says Greg Reisner, director at AM Best. “Now we’re starting to see some of those deals happen. We’re not surprised by it, but it’s always tough to predict the exact timing.
“It’s easy to start the year by saying that yes, it’s going to be the year of M&A, but the timing is very hard to pin down, although the conditions have been present for some time now. We’re in the later stages of a soft market and this is what happens at that later stage.
“Some people are under pressure, and there’s an exit, so to speak, that seems attractive at this stage,” he says.
“I wonder however whether recent catastrophe events may provide a pause, to see if this is a market opportunity before the market starts to stabilise and then improve and delay any M&A activity. My guess is that if there is any improvement it might be short-lived unless there’s a further catastrophe event.”
Reisner points out that many of the share prices of Bermuda players have jumped following the Validus-AIG deal, so everyone is thinking about further M&A activity, and that after any deal there’s increased speculation. In addition, after deals are announced boards of directors ask the question ‘is that something we should start to explore?’.
Going back to 2015/2016, XL and Catlin merged, and then RenaissanceRe and Platinum. This led other players to question whether they were of sufficient size, or if the strategic market landscape had changed. As a result companies had to re-evaluate what the perception might be of their own brand.
However, Reisner adds, AM Best noticed a while ago that the most recent deals seem to have gone along the lines of a company within a bigger company being sold, which in some cases is a nice fit for the acquirer.
The Endurance–Sompo and Allied World–Fairfax deals are good examples of this, but Reisner concedes that you can’t rule out some of the smaller players coming together and changing the landscape yet again.
“Anything and everything can be on the table all the time,” he says, “but it’s difficult to carve out specific bespoke parts of companies. That’s always the challenge—it doesn’t mean it can’t happen although it does seem harder than buying it all.
“I would think that a good chunk of 2017’s natural catastrophe losses are known at this time, and reserves are holding. If there are any specifics there won’t be too many, but I wouldn’t think that it’s something that can’t be baked into the price of any M&A deal. If they want to make a deal happen then I don’t think that would hold it up.”
Goals and challenges
In its 2018 Insurance Industry Outlook Deloitte’s Bermuda office said that most insurers remain focused on two overarching goals: growing top-line sales while bolstering bottom-line profitability. Standing in the way of insurers achieving these objectives is a wide range of challenges.
Not all of them are within the industry’s control, such as rising interest rates and catastrophe losses. But how effectively insurers anticipate, prepare for, and adapt to their shifting circumstances, both strategically and operationally, is well within their control, and can help differentiate them in the market.
According to Deloitte’s report, possible speedbumps heading into 2018 for P&C insurers include overcapitalisation, resulting in a soft market outside auto and property-catastrophe; rising auto loss costs due to expensive new tech and distracted driving; and soaring natural catastrophe claims due in part to climate change.
For life and accident insurers Deloitte sees possible hazards that include persistently low interest rates and uncertainty over timing and size of future increases, adaptation to new regulations such as the Department of Labor fiduciary rule for retirement products and outdated application and underwriting processes resulting in additional time and cost and undermining sales.
According to Clyde & Co Bermudian assets are also proving attractive, with two of 2017’s five largest transactions involving Bermudian targets: Endurance’s acquisition by Sompo for $6.3 billion and Ironshore’s acquisition by Liberty Mutual for $2.9 billion.
“Many Bermuda-based companies face low growth, deteriorating margins and cost pressures,” says Clyde & Co Partner Vikram Sidhu. “In parallel, US tax changes have diminished a key advantage for Bermuda insurers and reinsurers. That’s going to lead to greater deal activity involving Bermudian businesses in 2018.”
What makes a smooth deal
The Bermuda:Re+ILS report has been split into a series of articles, which have been listed below. In these articles, we asked a number of experts in M&A, or dealmakers, for their assessment of what Bermuda can expect now in terms of further activity and what might drive it. We also sought their views on what constitutes a good deal and how to make the process go smoothly.
According to Deloitte, the recipe for M&A success includes ingredients such as planning M&A within the overall enterprise growth strategy; identifying and liaising with targets that best align with the company’s M&A goals; conducting a thorough due diligence; exercising financial discipline to get to a bid price; and empowering the integration team to build the right culture and infrastructure to enable success. Click here to find out more.
For EY the hard work begins once the CEOs shake hands, and a strong corporate planning and development department can help in that regard. EY stresses that mergers often give rise to a lot of questions, which means that thoughtful consideration is required, combined with financial modelling of various potential outcomes. Click here to find out more.
Appleby stresses due diligence and that a full and complete understanding of the Bermuda M&A process at a very early stage is vital, pointing out that if you understand what is involved in a Bermuda merger or acquisition you can avoid any last-minute surprises. Click here to find out more.
Willis Towers Watson points out that smooth deals come about because they are targeted, well thought out, and executed effectively. You need the right internal team with a sound strategy and the right team of external M&A professionals to advise you. The motivation of the potential acquisition must be clear, along with the short and long-term benefits. It concludes that while getting the price right is important, what separates successful deals from unsuccessful ones is the planning and execution of the merger. Click here to find out more.
And finally PwC highlights the fact that economies of scale might be a driving force behind many M&A deals, but that might change as the economic situation evolves. Click here to find out more.