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The sharp upturn seen in the first half of 2011 in mergers &
acquisitions activity in the insurance industry continued from July
to December according to data supplied by Thomson Reuters, with 266
deals being completed compared to the 280 in the first six months.
The United States dominated the picture – accounting for
almost half the deals done, while just over a third were in Europe.
This is backed up by figures released in a recent renewal report by
reinsurance broker Guy Carpenter which noted that M&A deals in
the US and Bermudian non-life sector picked up last year in terms
of total dollar value to $12.8bn from $7.3bn in 2010.
We believe that levels of activity will remain high for the
coming year for a number of reasons. In Europe activity is
undoubtedly being driven by the imminent arrival of Solvency II.
This increased focus on capital requirements and a review by re/
insurers of their books of business – both live and in
run-off – and the capital they require will undoubtedly
trigger a range of corporate activity; from capital raising to
sales and purchases. Buyers will hope to apply more effective
capital management techniques to companies that may have been
operating relatively inefficient structures, while sellers will be
looking to reduce their capital requirements.
In the US, the much predicted hardening of insurance prices
seems to be getting underway, climbing at the fastest rate in
nearly four years, with the market expecting this trend to continue
as insurers move to make up for weaker investment returns. A
monthly review of midsize and large-cap US client data by Marsh has
shown a 5.3 per cent average uplift in commercial property
insurance rates in January from a year ago. If the market hardening
is sustained, valuation levels for insurers should increase and
this, combined with a prolonged period of reserve releases coming
to an end, could act as a catalyst for more M&A transactions.
There is also pressure building on some private equity investors to
realise their investment in insurance operations.
While activity in the emerging markets was at a lower level in
the last six months of 2011, there is still a strong consolidation
trend as the markets reach new levels of maturity.
There is a growing understanding that insurers need to build
scale in order to strengthen their balance sheets and sustain their
margins In many markets, so a wave of merger activity is expected
to create fewer, stronger businesses.
There is also still keen interest in the Lloyd's market,
with almost all the small-cap quoted vehicles rumoured to be
'in play' – some with a number of possible
suitors being mooted. In many cases this is being driven by
increasingly stringent entrance requirements by Lloyd's itself
– making start-ups hard to achieve – and
leaving acquisition as the only route to accessing the Lloyd's
platform with its rating and licences.
We believe that this trend for increased M&A activity is set
to continue in the coming years as regulators and customers look
for strength and stability in the risk transfer business.
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