A winding trail: a guide to M&A on Bermuda
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David Brown of EY gives his thoughts to Bermuda:Re+ILS on the latest state of mergers and acquisitions activity in the market.
In 2018 mergers and acquisitions (M&A) activity has continued, not just in the general market but also on Bermuda, which built on the heightened level of activity over the past few years.
Looking at what forces continue to drive M&A activity, David Brown, senior partner & regional insurance leader at EY, says: “Back in late 2017, when EY was predicting M&A activity for 2018, we thought there was going to be a number of ‘wow that changes everything’ moments.
“And wow, that was right. We have seen key strategic acquisitions such as the AXA/XL and the AIG/Validus transactions. I certainly did not see those deals happening as it would have been reasonable for both targets to have been seen as acquirers rather than targets.”
According to Brown, the market has continued to see private equity play a key role in the M&A market, including Apollo’s recent acquisition of Aspen. There was also the September announcement of Markel’s acquisition of Nephila, a premier player in the ILS space which, considering its previous acquisition of what is now Markel CatCo, was a strategic acquisition that changes the insurance-linked securities (ILS) landscape.
There was also continued investment in brokerage businesses as investors, including private equity, are attracted to the cash flow of these businesses, the most notable being the recent announcement by MMC of its acquisition of JLT.
“These are just a few of the deals that have occurred, and we expect the M&A activity to continue,” says Brown.
“When you look at the forces behind the activity, it primarily relates to the continued depressed pricing environment, the impact of alternative capital, continued historically low interest rates (although we are seeing some increases in recent months), the continued costs of regulation, and the need for investments in new technologies.
“All these items point to the need for scale. Because of the increased need to focus on the customer, a brand—combined with the effective use of data and analytics—continues to have increased importance.”
According to Brown, because the factors that have caused the significant M&A activity over the past few years persist, EY expects this activity to continue. In addition, the impact of US tax reforms and the resulting reduction of headline tax rates will make the US a more attractive place to invest.
Brown points out that the ability of US companies to repatriate previously trapped offshore profits will put more acquisition funding into the market, and that changes to the way a US company interacts with its foreign subsidiaries should stimulate US investment overseas.
“Valuations have been expensive in historical terms but that has not stopped the M&A train from racing down the track,” Brown says.
Looking at Europe, Brown foresees a reduction in the number of M&A deals as companies slow down due to the potential uncertainties relating to the UK’s departure from the EU.
He adds that Asia is seeing an increase in deals, with Japanese buyers accounting for the largest share.
EY is expecting a significant increase in M&A in Asia over the next six to 12 months with a significant increase in M&A in China, where certain deals had been on hold due to regulatory uncertainty.
The digital future
Brown also sees a focus on insurtech, with more than 1,000 of these companies working to change the insurance landscape. Although he feels it is clear that some of these entities will not be successful, he points out that some definitely will be.
“Approximately 30 percent of these insurtech companies are focused on disruption including new risks, but 70 percent of them are focused on optimisation, value-added opportunities and efficient delivery of services,” Brown says.
“Investment in insurtech disruptors such as wearables, artificial intelligence, sensors, and analytics will increasingly be a medium through which to build and access emerging consumer-centric digital ecosystems.
“This will accelerate convergence through business partnerships between innovative companies in very different sectors.”
He points out that the market has seen continued investment in new technologies and that EY expects this to continue as insurers find ways to operate in the context of innovative and complex, technology-enabled digital ecosystems.
For insurers, these digital ecosystems are both a massive opportunity and an existential threat as such ecosystems will also be a route for sector convergence, with players from outside the insurance sector competing for roles in the value chain.
“As I look down the road, I have to believe that some of the big technology companies are going to play a bigger role in the personal insurance and small business insurance sectors of the industry due to changing demographics and buying patterns, as well as the focus on big data,” he predicts.
“Data is the new oil from a global economic perspective and the companies that can use this data the best to enhance the customer experience are going to win the game.”
Asked if the trend towards wanting access to ILS and alternative capital will continue, Brown says that the market has seen tremendous growth in the alternative capital space with catastrophe bonds setting new records and ILS continuing to grow.
According to Brown, the ILS community has showed great resurgence since the 2017 hurricane losses, with the industry effectively reloading to serve its customers. EY believes that ILS capital will represent 30 to 40 percent of the global property-cat limit by 2020, and also sees institutional investors continuing to be interested in the ILS space.
This interest is driven by their attraction to non-correlated investment risk, as well as the existence of significant additional capital that is ready and waiting to come into the industry if events positively impact pricing in the industry.
“We believe the ILS industry will continue to play a key role in the property cat market, but the next generation of ILS will be in areas such as liability coverages related to cyber and other developing technologies, as well as opportunities to narrow the insurance gap, including underserved markets and risks such as flood,” Brown says.
Looking at the risks of M&A in terms of integration and whether they will all work, Brown feels that the success of a deal is primarily going to be driven by the strategy and brand. However, he adds, the focus on integration cannot be overlooked.
There will generally be cost-savings and other strategic synergies but the key is the execution as it relates to key markets, the talent agenda, and integration of systems.
Brown predicts that successful M&A will come from insurers combining the talent developing in centres of innovation with the deep experience and knowledge across their existing organisations, to create diverse teams addressing fast-changing opportunities.
Some of the deals that have recently been announced have indicated their focus to keep the targets autonomous for strategic reasons, but it will be interesting to see what changes will be made with a focus on consistency and efficiency, as well as the focus on capital efficiency as companies focus on the ever-challenging return on investment metric.
Brown is positive about what all this means for Bermuda’s risk landscape.
“Although we have seen a number of significant transactions in Bermuda, it continues to be one of the leading global financial and re/insurance centres,” he says.
“Bermuda is continuing to see growth of new companies, especially in the ILS space, the life insurance industry, and the run-off sector.”
According to Brown, the key to Bermuda’s strong history has been the talented underwriters, attorneys, accountants and other service providers that have made it a global centre of excellence.
Winning the talent agenda, including growing a diverse Bermuda workforce, will continue to be important as the Island competes on the global stage.
“Another key element of Bermuda’s success is how the insurance industry and the regulator work in a collaborative manner,” he concludes.
“The Bermuda Monetary Authority (BMA) is a strong and globally respected regulator, with achievement of regulatory equivalence, but works effectively with companies in a nimble and agile manner.
“You hear people talk about the fact that the BMA will listen and is accessible. This will continue to be key to Bermuda’s future.”
David L. Brown is senior partner of EY Bermuda and regional insurance leader for the EY region of Bermuda, Bahamas, British Virgin Islands and Cayman Islands. He can be contacted at: firstname.lastname@example.org>
EY, M&A, mergers, acquisitions