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Hot topic:
The P&C/reinsurance M&A market, and the challenges of the current soft environment
July 2016
Insurance M&A
London MarketThe Lloyd’s and London Market conditions and strategy are clear. Economies of scale will help alleviate increased regulatory and operational cost burdens. Challenging market conditions realistically rule out organic growth as an option for step-change with acquisition becoming the only viable way of achieving real growth. To offset this, years of strong results and reputation mean that the Market remains a very attractive investment opportunity for many. When mixed together, these drivers not only explain the recent deals seen, but also mean that many players still sit firmly in both the hunter and hunted camps. We expect further activity, albeit some in the form of sale of legacy books of business, in particular those containing UK employer liability (EL) claims, as insurers seek to free themselves from more capital intensive portfolios.
The past year saw record merger and acquisition (M&A) volumes in the global property and casualty (P&C) reinsurance markets reflecting a drive for geographical/product reach, scale, innovation and cost/capital efficiencies.
Beyond the creation of larger scale global insurers with greater diversification, has come a focus on use of technology and big data. This is changing the playing field for insurers who need to innovate in order to stay ahead in what remains a challenging rating environment. Whilst willing capital (e.g. foreign investment, private equity and alternative capital) continues, the focus for Boards remains driving their companies’ organic and inorganic strategies.
The P&C/reinsurance M&A market, and the challenges of the current soft environment
Nick Watford Partner
+44 (0)20 7213 3363 [email protected]
Jerome Kirk Partner
+44 (0)20 7213 5001 [email protected]
James Tye Partner
+44 (0)20 7212 4347 [email protected]
Contributions
Hot topic
Contributions
Data/CyberThe ability to leverage strong analytics capabilities acquired through a merger or acquisition into the rest of the enlarged business can bring real competitive advantage in soft market conditions. The deployment of superior risk segmentation and technical pricing, and the ability to identify and target more profitable niches, are just some of the additional benefits enabled by recent deal activity. The enlarged scale and diversification benefits achieved by M&A activity have also encouraged some players to introduce or ramp up their capacity around standalone cyber coverages, one of the bright spots in the market in terms of rates, and an area of growing demand in light of recent high profile cyber breaches.
Paul Delbridge Partner
+44 (0)20 7212 3085 [email protected]
Hot topic
Operations (Delivering deal value)Last year’s wave of potentially market changing deals in insurance has been remarkable. Whether these deals will be market changing and value generating in the long term remains to be seen. They are certainly transformational for the companies involved, given the sheer size and cross-border nature of these deals. Traditional integration playbooks focused on merging footprint, headcount, operations, etc. will be of limited use here. Success will be driven predominantly by softer factors. Creating a common culture will be the biggest integration challenge. Until alignment around a specific set of corporate values has been achieved, everything else is secondary.
Holger Hintze Director
+44 (0)20 7804 0559 [email protected]
RegulatoryRegulatory expectations for an insurer are an increasing barrier to entry for new start-ups, especially in the UK where, despite the UK government’s publically stated support for the insurance industry, the burden of proof the regulators are seeking remains high. Capital looking to access the insurance market is therefore being pushed either towards less regulated structures (reinsurance side-cars, insurance-linked securities (ILS)), or to acquiring existing businesses. Boards are looking to streamline governance and controls and optimise capital whilst, for companies that have recently come together through M&A, the pressure is on to realise the synergies expected from the transaction by rationalising legal entities and integrating operations. All of this is attracting increasingly intrusive and sophisticated regulatory scrutiny and therefore Boards have to be increasingly adept at navigating this regulatory landscape.
Peter Thomas Director
+44 (0)20 7212 6396 [email protected]
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2016 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
160720-113538-LM-UK
For further insights, data and blogs into the M&A insurance sphere, please visit Deal Talk:www.pwc.co.uk/deals/deal-talk
Hot topic
Contributions
ValuationsFollowing the announcement of Amlin’s takeover by Mitsui Sumitomo in September 2015, valuations in the London Market increased, on average, by c. 33% to over 2.0x P/TBV. Pricing multiples have since levelled back out to c. 1.7x P/TBV, which still remains high compared to a 10-year average of c. 1.3x. This uplift is reflective of a scarcity factor, which is now embedded into Lloyd’s pricing multiples for the few remaining quoted Lloyd’s insurers.
The challenges of a sustained period of soft market conditions and the consequent strain on earnings, continues to make organic growth strategies difficult to achieve in Lloyd’s and we expect to see further consolidation and premium valuations for some time.
Albertha Charles Partner
+44 (0)20 7804 5469 [email protected]
Corporate FinanceAs domestic insurance markets stagnate and organic growth becomes ever more difficult to achieve, we have seen an increasing number of P&C (and wider sector) insurers turning to M&A to drive up customer numbers and top line growth. Much of this activity has focused on insurers consolidating their existing market positions or increasing their presence in high growth emerging markets, as they seek to grow their top line and improve their distribution capabilities.
Andrew Claymore Director
+44 (0)20 7804 9731 [email protected]