Technology drives global insurance M&As, record 197 deals in H1’21

One hundred and ninety seven mergers and acquisition (M&A) deals were executed in the insurance industry across the world in the first half of 2021, global law firm Clyde & Co. has estimated in a new report seen by Business A.M.

The report noted that the number of deals represented a slight drop when compared against the number of deals posted in the first and second half of 2020 when 201 and 206 were recorded, respectively.

But the impact of the COVID-19 pandemic has raised technology as material to shaping decisions of whether or not to do a deal on a company, said Clyde & Co.

According to the law practice, COVID-19 has underlined the importance of having digital capabilities, and technology remains a primary driver of M&A, adding that the absence of sufficient technology investment on the part of a seller can be a dealbreaker.

The report shows that America took the lead on M&A activities with 116 deals in the first half, up from 102 and the highest level for the region since 2015, while Europe held steady with 51 deals, up by one from the second half of 2020 following a precipitous decline in transactions during the year.

However, the UK led Europe, emerging the second most active worldwide behind the US, and was followed by Spain and Germany.

The Asia-Pacific region on the other hand, saw completed deals plummet from 37 to 18, which represents the lowest level since Clyde & Co began keeping tabs a decade ago, and this was driven by geopolitical and post-pandemic uncertainty as Japanese acquirers were the most active in the region, ahead of India and Australia.

M&A activities in the Middle East and Africa fell to only five completed transactions in the first half after a standout year in 2020, in deals that involved Middle East acquirers – two from Israel and one each from Egypt, Saudi Arabia and the United Arab Emirates.

Commenting on the report, Ivor Edwards, partner and European head of Clyde & Co’s corporate insurance group said, “Despite the challenges of the last 18 months, the insurance industry has responded well and demonstrated a remarkable degree of resilience when it comes to getting deals over the line.

“Market hardening is creating organic growth opportunities for reinsurance carriers, but the availability of cheap liquidity, active interest from private equity investors and strategic re-underwriting of portfolios at larger carriers signal that an uptick in M&A is likely. The extent of that increase will vary by region and investor sentiment – dealmakers in the US are comparatively bullish, whereas their counterparts in Asia-Pacific remain more cautious as they wait for a more positive economic outlook.”

According to the report by Clyde & Co, in addition to the increasing number of more modest strategic divestments from carriers aiming to focus more on their core business, the first half of 2021 saw 11 deals  – including the largest deal of H1, which was the sale of UK-based RSA to Regent Bidco for $9.2 billion – valued at over $1 billion, compared to 15 for the whole of 2020.

Vikram Sidhu, Clyde & Co partner in New York noted, “We’re seeing a lot of legacy books being sold or prepared for sale. The sellers tend to be companies looking into the future in a robust and creative way, trying to clean up their balance sheets and free up capital. They are taking a proactive focus on the next five to 10 years.”

Eva-Maria Barbosa, partner at Clyde & Co’s Munich office, noted that the pandemic has underscored the importance of technology as one of the major attractions in M&A deals.

She said, “COVID-19 has underlined the importance of having digital capabilities, and technology remains a primary driver of M&A. Many startups have matured to the point where they have a proven business model and a robust balance sheet, which makes them very attractive to buyers. Meanwhile, on the flipside, the absence of sufficient technology investment on the part of a seller can be a dealbreaker – potential acquirers can be put off if they think they need to spend millions to make a target company’s IT systems fit for purpose.”

Highlighting the significant role of regulators in insurance industry, Clyde & Co stated that the sharp fall in M&A activity in the Asia-Pacific region was driven largely by the high regulatory bar in some jurisdictions as prospective buyers face higher solvency capital requirements in some markets, causing stricter scrutiny of business plans to assess the longevity of new entrants’ interest.

Joyce Chan, partner at Clyde & Co in Hong Kong said, “Regulators are becoming increasingly cautious. When new players come in and buy a particular insurer in the region, local regulators usually request quite a substantial capital increment as well. The solvency requirement expectation is much higher, acting as a brake on M&A. Conversely, regulatory actions are also making some significant portfolios available to acquirers. In Australia, for example, the knock-on effect of the recent royal commission is forcing the country’s major domestic banks to offload non-core lending businesses, which is making a number of attractive insurance assets targets for acquisition.”