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Deloitte expects insurance deals to pick up

Changing picture: the aggregate deal value and average transaction price to book value multiple for Bermuda M&A deals declined in 2016. Outlier deals with a P/BV multiple smaller than 0.5 or greater than three have been removed (Graphic by Deloitte)

Mergers and acquisitions in the Bermuda and US insurance markets this year are predicted to maintain the momentum seen in the latter half of 2016, when among the deals struck were seven valued at more than $1 billion.

But there is uncertainty about the speed of further consolidation. Some planned deals may be put on hold until the implications of the new Trump administration in the US, including potential tax and regulatory changes, become clearer.

Those are among the considerations highlighted in a review by Deloitte. The company anticipates eight to ten highly strategic “$1 billion plus” deals this year.

Deloitte’s 2017 Insurance M&A Outlook report identifies economic tailwinds and headwinds that could affect M&A activity for insurers.

Deloitte believes the low level of M&A activity in the first half of last year “was a pause, not an inflection point”.

John Johnston, Bermuda partner, said: “New merger activity in the Bermuda market in 2017 has been slow, possibly due in part to uncertainty around US tax reform and the relatively full valuations of Bermuda companies.

“It isn’t clear if the tax uncertainty will be resolved quickly or will get bogged down in the political process, but companies and their owners still need to deal with the underlying reality that the current pricing and investment climates remain unfavourable.

“So, barring a significant improvement in industry fundamentals, further consolidation in Bermuda seems to be a matter of when, not if.”

There were no deals above $1 billion in the first six months of 2016, however in the US and Bermuda markets there were seven in the second half of the year. Those deals included Sompo Holdings’ purchase of Endurance for $6.3 billion, Arch Capital’s $3.4 billion purchase of United Guaranty from AIG, and Liberty Mutual’s $3 billion acquisition of Ironshore.

The aggregate deal value in 2016 was $27.6 billion, a drop of 61 per cent on the $70 billion in 2015. However, the 2015 total was significantly boosted by the near $30 billion deal involving Ace and Chubb.

There were 522 deals last year, roughly in line with the 571 of 2015.

There were 19 Bermuda deals, up from 17 in 2015. The aggregate deal value fell from $16.5 billion to $14.2 billion year-on-year, while the average transaction price to book value multiple decreased 13 per cent from 1.18 to 1.04.

Looking ahead, Deloitte said likely macro-level tailwinds for M&A activity this year include the continuation of an environment of slower economic growth, and Federal Reserve interest rate increases that could help companies “model a favourable economic scenario in their deal pricing and make it easier to justify paying more”.

Deloitte also sees evidence suggesting a pick-up in activity of European insurers in the US in the latter part of 2017 and next year, due to “seemingly favourable trajectories for economic growth, taxes, regulation, and interest rates”.

On the downside, Deloitte expects four major headwinds for M&A in the insurance industry. One factor is the lack of targets, with few company boards and executives eager to sell.

Also, valuations are considered full, potentially hindering any deals that would pay “notably over book value”.

The other two headwinds are short-term uncertainty around policy and regulatory actions of the new US administration, and whether demand from Asian buyers will remain as strong as it was in 2014 and 2015.

In its report, Deloitte said it expects tailwinds to prevail against headwinds this year, and while there is unlikely to be megadeals of the scale seen in 2015, it anticipates around eight to ten deals above $1 billion in value.

Deloitte expects the stagnant life and health sub-sector to remain that way, however it sees a strong likelihood of deals in the middle-market of P&C and reinsurance sub-sectors due to all-time high capital levels and exceptional difficulty achieving organic growth.

The Deloitte report can be read at https://tinyurl.com/kesxkaj