Panel: Trends and lessons from Bermuda’s M&A past

Bermuda has a rich history of notable M&A deals which, especially in the P&C space, have changed the industry landscape. Here, three on-Island dealmakers dialled in to discuss what factors are driving consolidation now—and what they expect in 2024.

In attendance:

Joseph Gordon, head of deals advisory, PwC Bermuda

Neil Horner, director, head of corporate, ASW Law

Natalie Neto, partner, corporate finance and funds, Walkers

Moderator: Wyn Jenkins, managing editor, Bermuda:Re+ILS

“We have seen a lot of alternative financing.” Joseph Gordon

Joseph Gordon: We are seeing challenges due to the financing of transactions. It is difficult for people to propose acquisitions when you can get 6 or 7 percent bond yields. We have seen a lot of alternative financing and more focus on value creation post-acquisition to justify the cost.

“We have seen deals and activities pick up.” Natalie Neto

Natalie Neto: The first half of 2023 was particularly slow. But we have seen deals and activities pick up, which correlates with the pause in interest rate hikes and renewed lending activity. It has certainly been more active of late.

“All these deals show a continuing commitment to this jurisdiction.” Neil Horner

Neil Horner: While the macroeconomic shocks of 2022 had an impact on global mergers and acquisitions (M&A) in early 2023, there is continuing interest and acquisition activity and interest particularly in the Bermuda insurance sector. We have recently seen Brookfields’ $1.1 billion sale to Argo and AIG’s $3.1 billion sale of Validus to RenaissanceRe.

Outside the insurance space, we have seen Brookfield Infrastructure acquire Triton International for $4.7 billion in a take-private transaction.

The financial services and insurance sectors continue to be of great interest to potential buyers. All these deals show a continuing commitment to this jurisdiction of Bermuda. So despite the global trends, things have picked up, particularly with respect to financial services acquisitions.

Natalie Neto: There has been activity from a restructuring perspective. We have been involved in a lot of activity off the back of some of those cross-border restructurings partly driven by the fallout from the collapse of cryptocurrency exchange FTX and some of the activity around entities in Bermuda that were affected. We certainly had a fair number of restructuring deals.

To what extent is M&A activity on Bermuda Different or unique?

“We have the ability under our Companies Act to do everything.” Natalie Neto

Natalie Neto: The regulatory environment is one difference. If you plan a deal properly and, if regulatory approval is required, get them involved at the outset that serves companies well. When we do that, compared to onshore jurisdictions, we can demonstrate real flexibility.

The other reason that Bermuda is a great jurisdiction is there’s a good deal of familiarity with the way that we can structure M&A, which is familiar in the US.

Our deal protection measures are very similar to those you see in Delaware but we don’t have such rigid rules around fiduciary duties and bad faith, etc. So we can be flexible. We have the ability under our Companies Act to do everything: mergers, amalgamations, continuations, discontinuations. So when you compare Bermuda to other jurisdictions, we can effect a merger without having to go through a court approval process, for example.

“There are transactions where it may be more advantageous to use schemes of arrangement.” Neil Horner

Neil Horner: To take one prominent industry, Bermuda has a very large number of significant insurance and reinsurance companies many of which are listed on overseas stock exchanges such as the New York Stock Exchange. Over the years we have seen a large number of multi-billion dollar deals (for example, AXA’s acquisition of XL, Chubb and ACE, Sompo and Endurance and Apollo and Athene). These transactions are in many cases multi-jurisdictional and involve Bermuda lawyers working alongside their counterparts in New York and other leading insurance centres.

In some instances, in addition to the merger and amalgamation routes, there are transactions where it may be more advantageous to use schemes of arrangement, which is a court-sanctioned process. Helpfully, in terms of insurance transactions, the Bermuda Monetary Authority (BMA) here is well versed, and has lots of experience with complex M&A.

Most of these processes tend to have multinational components, so you’re looking at different regulators. But the BMA has deep insight and understanding of complex insurance structures, which means essentially that it can do what it needs to do quickly, effectively and responsibly.

Joseph Gordon: Early engagement with the regulator is important, and the BMA has the deep sector expertise.

Natalie Neto: We’ve seen a significant amount of private equity (PE) investment into the insurance sector and life sector. They like that regulatory certainty, flexibility of vehicles, familiarity with the jurisdiction, and all that plays into it.

We have also seen activity outside insurance, for example, in the shipping sector. The acquisition by Stonepeak of Textainer is an example of PE money coming in to acquire a Bermuda-listed vehicle. Bermuda-listed companies can become the target of potential take-privates.

“One very active sector which is growing is the run-off space.” Joseph Gordon

Neil Horner: In industries that aren’t subject to Insurance Act or other regulatory approvals the process is generally much simpler, particularly in the case of companies listed on approved stock exchanges. But Bermuda is a very attractive domicile for these sorts of transactions given the variety of sophisticated transaction structures that are available.

Natalie Neto: Another benefit of Bermuda is the time zone coverage and our geographical location. It means that a deal can happen. A lot of the feedback we get is the availability of the advisors on a deal, no matter what time it is and no matter where you’re situated.

Joseph Gordon: When we are doing deals which involve our US colleagues and our European ones, sitting somewhere between the two in terms of the time zone allows us to communicate. It is obviously more challenging, due to the time difference, when we are dealing with colleagues in Singapore and Hong Kong, but we still make it work.

One very active sector which is growing is the run-off space. We have worked on a number of projects advising run-off players either setting up or on the acquisition side.

The Island is attractive to them for a number of reasons, not least the regulatory environment. There is also the track record of transactions and a concentration of players. The Island is becoming the main focus for that sector and we see some collaboration too.

Natalie Neto: There is a wide structure of vehicles available, particularly in that space. The fact that we can set up incorporated segregated accounts companies particularly plays into that space. So again, it is back to flexibility, availability of vehicles, familiarity, English common law principles that most people recognise and being able to speak the same language as the US for the most part that builds our rich history.

Where else are you seeing growth?

“The P&C side has seen more steady growth.”  Neil Horner

Neil Horner: There’s still appetite to set up new structures—in the life space in particular. We’ve had some huge companies set up in recent times, but recent legislative enhancements in the life space could, in the not-too-distant future, lead to some consolidation.

P&C structures are also being set up, but fewer than life companies. The life market has seen an explosion and growth that has happened pretty quickly, whereas the P&C side has seen more steady growth.

“Some of the players were not able to do larger deals.” Joseph Gordon

Joseph Gordon: I agree in terms of the potential consolidation in the life space between a lot of new players in the market competing for the bigger ticket deals. We may see consolidation potentially because some of the players were not able to do larger deals.

Can you offe examples of deals that represent best practice or have worked well?

“Whatever the deal, it is a ‘rising tide lifts all boats’ mentality.”  Natalie Neto

Natalie Neto: Outside the insurance space, we have seen some interesting advisory firms coming into the market via acquisition. They have found an entrance into the market where historically, Bermuda has been quite a difficult market for advisers to launch in. Those sorts of inward investments are notable.

The standouts for me remain the Apollo acquisition of Aspen and the recent Brookfield deals. They are obviously massive deals and therefore complex. But they involved the regulators early, and they rose to the occasion and helped the jurisdiction look good.

Whatever the deal, it is a “rising tide lifts all boats” mentality. I would say the reputation of Bermuda being a difficult place for inward investment can be changed by seeing such deals.

Joseph Gordon: It’s always a positive sign and an endorsement of Bermuda that international players are looking at either acquiring local operators or in some cases, taking the top-tier teams from other firms.

“There are always additional local factors that need to be considered.” Neil Horner

Neil Horner: Merger 101 textbooks indicate that the best deals are those that inter alia are well diligenced with clear objectives and which are supported by a strong transition team and a carefully planned and performed integration. There is nothing unique to Bermuda in those universal criteria but clearly in the Bermuda context, there are always additional local factors that need to be considered (such as work permits for expatriate employees) and the impact of acquisitions on the Bermuda economy.

There are many success stories and one need look no further than ACE and XL, the two original “big cat” insurers—ACE was acquired by Chubb and XL by French insurance group AXA.

These are all examples of a very important transactions that have been successful and demonstrate the continuing attractiveness of this domicile.

Joseph Gordon: One trend we have seen is companies retrenching and focusing on core markets. Thankfully Bermuda is one of them, but that has driven some activity.

How important is post-deal integration?

“We often get involved with technology integration.”  Joseph Gordon

Joseph Gordon: Post-merger integration is a big part of our deal proposition, and it can be everything from generating synergies within the business to looking at headcount if needed. We often get involved with technology integration—for example to add new technologies. We are seeing that as a key part of some of the acquisitions we have worked on recently.

Natalie Neto: In terms of why something is a good deal versus a bad deal, is how much work might be done around change management at the front end aligning the workforce. They tend to be the more successful deals. Bermuda is a small place, so you tend to hear if things are going extremely badly in that regard.

“Doing its best to integrate the team into the new culture is key.” Neil Horner

Joseph Gordon: Cultural fit is essential. We have seen a few transitions where they are totally different cultures and in some cases it does not work.

Neil Horner: Particularly if a company acquires another firm, being respectful of the culture it has acquired and doing its best to integrate the team into the new culture is key. The most successful transactions are those with that integration and transition and the respect for the culture as it becomes integrated into the acquiring company.

“We do get involved in post-integration and post-acquisition reorganisations.” Natalie Neto

Natalie Neto: We do get involved in post-integration and post-acquisition reorganisations. We have a strong regulatory practice that is involved in harmonising policies, procedures, etc, after those deals. They tend to have a very long tail in that regard.

Joseph Gordon: For some of the global M&A activity, we sometimes see after a deal that there is a need to do some strategic M&A and maybe divest, because it’s not a core focus of the combined business going forward.

What is the key advice you would give firms about to be involved in M&A?

“You need to get your ducks in a row from a diligence perspective.” Natalie Neto

Natalie Neto: It depends on the scenario. We can help prepare companies. But if it’s a seller looking to sell, the big thing for me is preparation. When deals do not go well or succeed in line with expectations, it all comes down to preparation and understanding that there will be a process—you need to get your ducks in a row from a diligence perspective.

Get your skeletons out of the closet. Do your due diligence and dive into some of the global regulations as well as the local regulations, especially if it is a regulated target. The more you can do to get yourself ready for an acquisition from a buyer’s perspective, the smoother the process should be.

I always ask: “What is your reason for this acquisition?” Make that known, particularly to your advisors, so that we can keep our eye on the prize when we are going through the process and advise you accordingly.

The other thing is to engage with the regulator, if that is applicable.

Neil Horner: Preparation is absolutely essential. The most successful acquisitions are those that have a good diligence process. As lawyers we don’t look at everything—there has to be a team, with financial people looking at financial information. It all has to be synchronised—it means picking out the key things that potentially can affect pricing as soon as possible.

To the extent you do come across issues, it is essential to seek warranties and indemnities.

You have to be quite focused and targeted: work with advisors in different jurisdictions to pick up, from a Bermuda perspective, the key Bermuda points that can impact the transaction. And obviously there’s the regulatory overlay, which is essential.

“To the extent you do come across issues, it is essential to seek warranties and indemnities.” Neil Horner

Joseph Gordon: In the current macroeconomic conditions, with tighter financing markets and other things, we are seeing a big focus on deeper diligence. This goes beyond just looking at the historical performance, but studying what the technology roadmap looks like—are there any strategic growth or value creation levers?

Technical capability is key and in a lot of the transactions we are working on, it’s either the technology is there and that is driving the acquisition, or there is a technology that can be applied to make the target entity more profitable through changing the business model.

A deeper level of analysis is required than we have previously seen. Part of that is the uncertain conditions and people needing to do the diligence thoroughly before they commit to financing the transaction.

Natalie Neto: As you say, it is acquiring transformative technology, but the bigger picture context changes the way you might approach the deal. And it certainly changes what you need in terms of IP protection. So understanding at the outset what’s driving the process is very important.

The other thing is managing expectations from a timing view. We all get that we need this done tomorrow, and that might be very valid but when you have regulatory approvals, where you have a diligence process, when it’s a cross-border acquisition it takes time.

One of the biggest headaches is managing the expectations on timing from both sides; it sometimes falls to us to convey the bad news about its not being able to be done by tomorrow.

 “We are seeing a big focus on deeper diligence.” Joseph Gordon

Neil Horner: In regulated sectors where regulatory approvals are required, advisors need to be mindful of the timing constraints if you’re trying to close transactions by a certain date.

In an increasingly complex regulatory environment the approval process can take longer, so as much time as possible should be built in. Early reach-out to the regulator is essential.

What are your predictions for M&A activity in 2024?

“There will be an uptick in M&A activity in the first half of next year.”  Joseph Gordon

Joseph Gordon: Looking to 2024, we are optimistic we can start to see inflation coming down, and interest rates stabilising. We are optimistic that there will be an uptick in M&A activity in the first half of next year, and some opportunities for accelerated or distressed M&A because of liquidity pressures on companies.

They have been holding on for the last few quarters, but there is definitely pressure out there because of a change in the financial environment. We optimistically view that as an opportunity for people to make acquisitions in the distressed space.

“Bermuda is becoming a focus of interest for restructuring opportunities.” Natalie Neto

Natalie Neto: We are definitely seeing an opportunity for the M&A sector to get busy again. A number of Bermuda-listed companies are considering whether they want to remain so, and we saw take-privates pick up. That is not likely to abate any time in the future.

We are expecting to be fairly busy because of the macro economic climate. Bermuda is becoming a focus of interest for restructuring opportunities.

Bermuda’s position on corporate income tax and whether or not it’s going to introduce it is an interesting one. People are seeking a bit of certainty. That could prove fertile ground for M&A activity, even if it’s just off the back of restructuring.

“On the corporate tax initiative, it is going to take some time to get the infrastructure in place.” Neil Horner

Neil Horner: Generally, M&A activity has definitely picked up in the second half of 2023, and I think that will continue. In the life insurance sector, I think we will start to see consolidation—if not in 2024, certainly by 2025.

On the corporate tax initiative, it is going to take some time to get the infrastructure in place and I think the current timetable is optimistic. We will await the final proposals and progression of this with interest.

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