Increasing premium rates and a more optimistic outlook for most lines of business will make stronger market players more likely to look for growth opportunities through acquisitions, some of which may have been put on hold in 2020 due to the COVID-19 pandemic, according to Clyde & Co’s February 2021 insurance growth report.
The report predicted that despite the economic uncertainty and heightened deal scrutiny, insurance mergers and acquisitions (M&A) will surge in the first half of 2021.
The number of completed deals globally is likely to surpass 220 in a six-month period for the first time since 2019, and could rise even further in the second half of the year.
“Deal-makers’ appetites have returned, buoyed by growing confidence in the economic outlook and the sense that there are opportunities to be had,” said Ivor Edwards, head of Clyde & Co’s European Corporate Insurance Group.
“Despite market hardening, many of the fundamentals driving M&A will persist. These include competition for assets, the need to diversify portfolios, add digital capabilities, and increase scale and market share.”
Edwards added: “The availability of plentiful capital, combined with a deeper pool of targets, will give buyers plenty of choice although we expect them to select acquisitions carefully to ensure the best fit with their strategic objectives.”
The report noted that the improving market conditions have seen insurers raise capital and also attract more funds into the industry including from private equity (PE), which will help finance more M&A deals.
Eva-Maria Barbosa, a partner at Clyde & Co’s Munich office, explained: “The involvement of PE giants Kelso and Warburg Pincus as part of Arch’s deal to acquire Watford Re is just one example. In addition, with interest rates at historic lows, buyers may look to tap cheap debt or deploy cash stored away during the pandemic to fund acquisitions.
“Meanwhile, the trend of new players entering the re/insurance market, often backed by an established figure with a proven track record capable of attracting significant financial backing, is set to continue.”
“The availability of plentiful capital, combined with a deeper pool of targets, will give buyers plenty of choice.”
Ivor Edwards, Clyde & Co
Technology a driver
Analysts at the law firm highlighted technology as a primary deal driver in 2020 and beyond as insurers look to insurtechs that can deliver a competitive edge, be it through acquisition, investment or partnership.
The report noted that the pandemic has accelerated the adoption of technology across the insurance industry, underpinning deals of every size. It highlighted that insurers taking stakes in insurtech startups had increased across all geographies. It also suggested that appetite for bigger deals is returning. However, the coming year will see a widening pool of assets of all sizes becoming available.
“The pandemic has forced insurance businesses to review their strategies and be especially focused on which products they want to be underwriting and in which markets.
“A number of firms are actively pursuing opportunities to exit certain non-core businesses through restructurings, divestitures, and other deal activity, including to free up capital to redeploy to more preferred areas and products in the hardening market.
“As a result, legacy transactions will continue to grow and will be a feature of the market in the coming year,” said Vikram Sidhu, a New York-based Clyde & Co corporate insurance partner.
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