The sharp drop in M&A activity in Asia Pacific can be attributed in part to the high regulatory bar in some jurisdictions
Mergers and acquisitions (M&A) in the global insurance industry dropped back slightly in the first half of 2021 with 197 completed deals worldwide, down from 206 in the second half of 2020 and 201 at the same point last year, according to Clyde & Co’s Insurance Growth Report mid-year update.
Driven by robust activity in the US, the Americas led the way with 116 deals, up from 102, pushing M&A in the region to its highest level since 2015.
After a steep drop in transactions in 2020, Europe held steady in H1 2021 with 51 completed deals, up one on the previous six-month period.
In contrast, Asia Pacific saw completed deals fall from 37 to 18 – the lowest level since we began this report in 2011 – as post-pandemic and geopolitical uncertainty weighed heavy on deal-makers. Japanese acquirors were again the most active compared to 2020, ahead of India and Australia.
Ivor Edwards, partner and European head of the Corporate Insurance Group at Clyde & Co, said: “Despite the challenges of the last 18 months, the insurance industry has responded well and demonstrated a remarkable degree of resilience when it comes to getting deals over the line.
”Market hardening is creating organic growth opportunities for re/insurance carriers, but the availability of cheap liquidity, active interest from private equity investors and strategic re-underwriting of portfolios at larger carriers signal that an uptick in M&A is likely.
”The extent of that increase will vary by region and investor sentiment – deal-makers in the US are comparatively bullish whereas their counterparts in Asia-Pacific remain more cautious as they wait for a more positive economic outlook.”
The sharp drop in M&A activity in Asia Pacific can be attributed in part to the high regulatory bar in some jurisdictions. Not only do prospective acquirors face higher solvency capital requirements in some markets, but there is a more robust scrutiny of business plans to assess the longevity of new entrants’ interest.
Joyce Chan, partner at Clyde & Co in Hong Kong says: “Regulators are becoming increasingly cautious. When new players come in and buy a particular insurer in the region, local regulators usually request quite a substantial capital increment as well.
“The solvency requirement expectation is much higher, acting as a brake on M&A. Conversely, regulatory actions are also making some significant portfolios available to acquirors.
”In Australia, for example, the knock-on effect of the recent Royal Commission is forcing the country’s major domestic banks to offload non-core lending businesses, which is making a number of attractive insurance assets targets for acquisition.”
From an outlook perspective, M&A activity in Asia Pacific is likely to remain subdued until the markets have stabilised post-Covid-19 and there is greater certainty about the economic outlook.
Joyce Chan says: “Deal-makers in Asia Pacific remain in wait-and-see mode for the time being. Given the cost and effort required to get transactions over the line, insurers are considering a range of growth options.
”These include strategic alliances with online banks, e-commerce giants, or other online retail platforms to access new distribution networks.
”The MGA model is likely to expand, especially in the medical insurance sector due to the uptick in middle-class spending coupled with an ageing population.”