More and bigger to come
What is currently affecting M&A activity in the Bermuda market?
There are multiple factors affecting Bermuda re/insurers as both acquirers and targets in the market including tax reform, portfolio optimisation and access to capital markets.
US tax reform will influence the business models of US re/insurance companies and their global competitors who have a US presence. The earnings and capital freed up by a lower tax burden could fuel expansion and acquisition activities by US companies seeking to achieve scale or diversification.
Global companies with US platforms may seek ways to restructure their operations for tax planning purposes, and transactional solutions could prove to be attractive. While it is not clear exactly what the impact of US tax reform will have on the Bermuda market, it is notable that the level of activity was muted in 2017 (Figure 1) while the market has seen two significant acquisitions announced in 2018 as well as widespread speculation about further consolidation.
The traditional pricing cycles of re/insurance businesses may no longer apply. We have observed Bermuda re/insurers seeking non-traditional opportunities to grow and diversify their business models and portfolios.
Bermuda continues to have a competitive advantage on the global stage given its proven underwriting track record in the Americas and Europe and its reputable regulatory framework. We have seen growth in the long-term sector and other asset-intensive books of business as well as acquisitions driven by gaining market entry or access to new platforms.
Despite a significant year of insured losses in 2017, the capital positions of most Bermuda companies continue to be strong. Some additional capital has been raised through traditional channels and alternative capital sources have also responded. The abundance of capital will continue to keep rates competitive which in turn may drive consolidation.
Is there any appetite for M&A at the moment and will that change?
Yes, and we expect this to continue given the factors mentioned above. We may see more US or global re/insurers making acquisitions in the Bermuda market as well as continued interest from emerging buyers, such as private equity companies, pension funds and the like.
Compared to other possible targets, such as managing general agents and Lloyd’s businesses, Bermuda companies may seem relatively attractive from a price standpoint, at least for the time being.
The capital markets have demonstrated significant interest in Bermuda and the re/insurance industry, as evidenced by the emerging buyers discussed above. For these investors re/insurers create a stable and diversified form of leverage. In addition, incumbents have managed 10 years of favourable loss experience despite the prolonged soft market.
This will also impact Bermuda re/insurers’ appetites to continue playing in this market and we expect them to diversify/grow into other lines of business and regions. All these factors may give potential sellers the opportunity to demand larger price to book multiples.
What could the M&A deal flow in 2018 be like?
Two significant deals have already been announced and we expect that there will be several others undertaken this year, some smaller and some possibly larger. Given the long period of consolidation the market has experienced already, there are not many clear strategic match-ups within the Bermuda market so outside buyers could be more likely.
That said, the remaining Bermuda participants are as likely to be buyers in any further M&A activity. We also expect to continue to see run-off books of business, especially the most capital-intensive ones, being bought and sold not only by the traditional players, but by emerging buyers as well. Overall, we expect a deal volume that is greater than that experienced in 2017, and that the larger Bermuda participants are well-positioned in this arena.
What tips can you give for enabling M&A deals to be completed smoothly?
The recipe for M&A success includes the following ingredients:
Plan: consider M&A within the overall enterprise growth strategy; an overall business portfolio review should inform conclusions about potential acquisition or divestitures.
Engage: proactively identify and liaise with targets that best align with the company’s M&A goals.
Analyse: conduct a thorough due diligence and exercise financial discipline when determining a bid price.
Integrate: empower your integration team throughout the diligence process to build the right culture and infrastructure to enable success.
John Johnston is CEO, Deloitte Caribbean and Bermuda Region.
Boris Lukan is partner, Consulting, Deloitte US.
Heldar Carreiro is director, Audit & Assurance, Deloitte in Bermuda.
Gokul Sudarsana is senior manager, Consulting, Deloitte in Bermuda.