After a prolonged feeding frenzy of merger and acquisition activity things seem to have quietened down. But have they? Bermuda:Re+ILS investigates.
It’s been a busy time recently for mergers and acquisitions (M&A), both in the general global market and also on Bermuda, leading many companies to eye each other and wonder which of them will be the next one to hit the headlines.
The latest deal has been the acquisition of Tokio Millennium Re by RenaissanceRe, but there have been a number of others, some friendly, some neutral and some downright hostile in recent years, all of which have dominated the headlines in many places.
All of this leads to the questions of how many companies remain out there to be acquired, and whether the market has any more room or appetite for such deals.
There hasn’t been the wave of new companies recently that we have seen in the past, born from market forces that called for new players. While there has been the creation of new platforms here and there, that’s not the same as creating new companies that want to join the market in a significant way.
We therefore asked the question ‘Do you anticipate further M&A activity in 2019, to what extent and what will drive it?’ in a bid to find out what market players thought. We received some thoughtful and considered answers in response.
Big fish get bigger
According to Neville Ching, head of Capsicum Re Bermuda, there’s been a lot of M&A activity in Bermuda over the last few years which mirrors the consolidation trend being seen across the industry.
Ching says that many of the large transactions have taken place in Bermuda, such as Sompo’s purchase of Endurance for $6.3 billion in 2017, AIG’s purchase of Validus for $5.56 billion and AXA’s acquisition of XL Group for $15.39 billion, which he says was the largest transaction by a significant margin in 2018.
Pressure on expenses, growth and premiums, the quest to attract and retain the best talent and the desire to have a more diversified offering are some of the reasons for this consolidation.
“Regulation in Bermuda makes it an attractive market for international investment too,” Ching says. “The change to US tax laws reducing corporate tax rates does not benefit Bermuda-based companies, but US-based companies which benefit from the changes could use the gains to purchase Bermudian insurers/reinsurers.”
According to Ching, the market remains under pressure and companies are looking to refocus and diversify, and reinsurance is no exception. Given these dynamics, it seems likely that there will be further M&A activity this year. Who will be involved? It would take a bold person to make those predictions as some of the deals announced have been unexpected (such as RenaissanceRe and Tokio Millennium Re) and there is no obvious pattern.
“I think we have to ‘watch this space’ and see what unfolds throughout the year. Maybe pick a couple of outside bets, who knows you may be right,” he says.
Kathleen Faries, chair of ILS Bermuda, thinks that M&A activity alone is not going to create sufficient growth to feed the amount of capital that is currently allocated and certainly not enough for the capital that could be allocated to the ILS asset class.
According to Faries, the protection gap in global property risk alone is estimated at over $200 billion. Swiss Re found that the global mortality and property protection gap now stands at $500 billion, in insurance premium-equivalent terms. Climate change and emerging markets will exacerbate unprotected risk globally.
“We have been beating this drum for some time now, but it is still the case that we need to find ways to bring more uninsured and underinsured risk to the market,” Faries says.
“The inherent risk with M&A activity, without real expansion of the market, is that we end up with a handful of markets and brokers that control the market and real innovation can’t find its way into the market.
“Cycling from ‘the many’ to ‘the few’ is just that, a point in the cycle and not necessarily a positive for moving the industry forward.”
Brad Adderley, partner at Appleby, points out that we are only one quarter of the way into 2019 and Appleby and Bermuda more widely have both seen the conclusion of some significant transactions.
According to Adderley, some are optimistic of further consolidation while others are expecting deal volume to tail off.
“We certainly wouldn’t rule out further consolidation and we also wouldn’t rule out opportunistic transactions where changes in commercial focus or events provide motivation and opportunities for market participants to strike a deal.”
James Willison, managing director at Web Connectivity Limited (WCL) says that following the M&A activity in 2018, the consolidated balance sheets of the merged companies are of such a size that many smaller companies are likely to look to M&A in order to stay competitive.
“What is more, as rates within certain classes of business harden, companies will look to capitalise on the changing market,” Willison says.
“For that reason, companies that are currently trading at below book value are a target for potential acquisitions—especially if they can offer strategic growth to a larger international player.
“However, it is unlikely that the level of activity within the M&A space will continue at the same pace given the scale of the mergers seen in 2018 and previous years.”
According to Willison, the arrival of insurtech and a new digital era has put pressure on insurance companies to invest in technology. The industry has been introducing a number of propositions via strategic partnerships, incubators, equity investment, or internal bespoke development, signalling the industry’s desire to innovate and gain access to insurtech capabilities. It is likely this trend of M&A will continue into 2019, he predicts.
“However, below the surface of the big headline deals and insurtech investments, I would expect to see a rise in M&A activity in the supplier market this year. This trend of using M&A to reshape and transform business models may create a scenario where service providers need to get bigger to accommodate new mandates.
“In order for service providers to retain their position as the supplier to these larger companies they are likely to require larger balance sheets, given the scale of acquisitions that occurred in 2018.”
More to come
Andrea Best and Parimah Hassouri, partners at Drinker Biddle & Reath, point out that in 2018 there were a lot of very high-profile transactions in the insurance industry, driven by many factors including a low interest rate environment and excess capital in the industry.
According to them while these factors—particularly the first one—are still present to a degree, it is less likely that the market will see the same volume of mammoth deals this year. Given the extent of consolidation that has been seen in the recent past, they do not expect that 2019 will see as many deals as the size of AXA/XL, Validus/AIG, Cigna/AETNA and Marsh/JLT transactions.
However, Best and Hassouri think that M&A will continue, and there will likely be further consolidation in the industry, but probably on a smaller scale. For example, the market might see more of a focus on joint ventures, or investments in insurtech and other partnerships, and smaller strategic acquisitions. Of course, factors such as the UK’s departure from the EU also play a role, and depending on how that ultimately turns out then it is possible that there might be some further transactions when there is less uncertainty in the UK/European economy.
They conclude by pointing out that the US health insurance and healthcare industry continues to go through turmoil as it faces more changes to the Affordable Care Act, which could again lead to more consolidation in that space.
Bermuda, M&A, activity, predictions, consolidation