Big is better—for now
What has driven M&A activity?
Ferris: The driver for M&A activity should always be the benefit of shareholders, but this can take many forms. A seller will be looking to get value for non-core businesses to grow its core lines or to find synergies through becoming part of a larger group. Alternatively, from the buyer’s perspective, it may be seeking to enter a new market, increase market share or reduce costs, faster than could be achieved organically.
From analysis of the AIG–Validus deal, it would suggest AIG is looking to diversify its business by acquiring one that operates very successfully in alternative but complementary markets. The value AIG sees in acquiring such a business, rather than growing one organically, is reflected in the premium paid on Validus’ share price.
What trends are currently affecting the market?
Ferris: Everyone is trying to generate shareholder returns. While rates and investment returns are low we are likely to see M&A deals where ‘big is better’, as well as insurers taking opportunities outside their core business lines. Should rates and investment returns start to rise, I foresee non-core businesses being sold off and a number of niche players coming to market as they can react quicker than mega insurers.
In the wake of the AIG–Validus deal, will this encourage more or less activity?
Fenton/Roy: Consolidation is a theme that re-emerges every time a large transaction is announced, whether in the US or Bermuda, insurer or reinsurer.
The reality is that multiple factors have to be present across a large part of the sector for there to be a consolidation trend.
First, there needs to be strategic determination by an acquirer to achieve growth (more premiums, new geographies, or new products) well beyond historic performance.
The second element, almost equally important, is the ‘wherewithal’ to do a transaction (ability to pay: excess capital, attractive equity markets or valuations, cheap finance).
The final criterion would be that there must be sufficient willing sellers for this to become a trend—regardless of which specific geography in the world is attractive or vulnerable to acquirers due to capital or regulatory pressures.
The colossal weather catastrophe years have taken capital out of the industry, but not enough to reset or force massive consolidation.
What has the past 18 months been like for M&A activity?
Fenton/Roy: As the data from our 2H 2017 Insurance Deals publication highlights, while transaction activity in 2017 was robust, the decline in megadeals from 2016 was a function of uncertainty about the direction of tax and regulatory reform in 2017.
James Ferris is Advisory leader, PwC Bermuda.
Leslie Fenton is managing director, PricewaterhouseCoopers Corporate Finance.
Ritendra Roy is director, PricewaterhouseCoopers Corporate Finance.
