Researchers usually identify two waves of increased M&A activity over the last 25 years. The first one took place in the 1990s, whereas the second transpired in the years leading to the global financial crisis of 2008. A recent research report (a full version of which is available here) published by Swiss Re, a reinsurer, offers a very comprehensive analysis of the factors driving the M&A activity in general and deal activity in the insurance sector in particular.
When seeking to explain the causes for M&A waves researchers usually refer to two groups of factors. The first one comprises the changes in business environment, including macroeconomic and regulatory developments, changing customer preferences and the cost and availability of capital. The other group relates more to the factors affecting the choices and actions that management and investors make, looking at the role of market imperfections and behavioural biases and linking the M&A activity with the stock market psychology. Some argue that a combination of factors from both groups might be at work simultaneously, for instance, that merger activity could be driven by management envy which is supported by the changes in the economic environment. In any case, the probability that M&A activity might be undertaken for the management’s personal interest and not to maximise shareholder value remains fairly high.
According to the report, the insurance sector M&A wave of 1990s gets attributed primarily to the structural and cyclical changes, like deregulation and liberalisation of the markets, growing stock market, availability of credit and increased risk absorbing capacity because of no major loss events that led to increased pressure to consolidate. The second wave in mid-2000s was also fuelled by the economic growth and stock market increase, but with a significant role played by the innovation in risk transfer techniques and new alternative sources of capital available to the industry.
On another topic, it is interesting to note that the private equity investors who are one of the main drivers behind the financial services M&A, have been demonstrating a growing but still moderate activity in the insurance sector. Their interest has so far been targeted at some specific areas. For instance, PE investors have been active acquirers of insurance brokers, and not only in leveraged buyouts or primary transactions but also in secondary buyouts (where the target is being acquired from another PE fund). Kohlberg Kravis & Roberts, the almost iconic name in the PE industry, has been particularly active in this segment, having been involved in three such transactions since 2012.
Moreover, the low risk and cash flow generating business of insurance brokerage has been so appealing that some PE funds have even gone one step further and established a consolidation vehicle. For instance, Global Risk Partners, a UK PE-backed company, was established in 2013 with a view of growing through acquisitions of small and medium sized brokers.
Referring to the increase in the transaction pipeline over the last six months and very optimistic recent industry surveys the report suggests that the post-crisis period of subdued activity is about to change. It is expected that the insurance companies will have finally adjusted to lower profitability levels and might be seeking to expand through acquisitions in higher growth markets. Meanwhile, the interest from PE investors is likely to remain focused on specific segments and sectors only, like insurance brokerage or specialty reinsurance.
© mergers.lv