Introduction
The insurance industry faces some of the most testing market conditions since the turn of the 21st century – impacting brokers and carriers wherever they are located. Interest rates remain low, albeit with some possible upward adjustment in the US, while levels of competition in the market are keeping premium levels depressed – a fact exacerbated by the inflow of alternative capital into the reinsurance market. The recent vote by the UK to leave the European Union also means that that, in this region, there will be a sustained period of uncertainty. With thin investment returns, insurance businesses are having to focus very keenly on their underwriting results, and on strategies to reassure investors that that there will be sufficient returns on equity.
Almost every public statement from carriers and brokers alike talks about their search for growth, so we decided to use our annual report to examine this trend. M&A as a route to growth has certainly seen considerable popularity as a strategy in the last several years – "achieving scale" has been quoted by many a CEO. Market executives have been deploying excess capital, and the ability to borrow cheaply, to look for inorganic growth – seeking out deal activity that can deliver consolidation, diversification and geographic reach.
Although 2016 has not yet seen the announcements of any of the mega-mergers that typified the deal landscape last year, there is no doubt that general M&A activity was buoyant in the last nine months and, with no change in insurance market conditions forecast, few businesses would rule out some transactional activity in the next year.
Volume of insurance deals completed globally: January 2009 – March 2016
The appeal of M&A in achieving scale has clear advantages, but the challenges of finding a suitable target and, significantly, at a suitable price, may cause insurance businesses to consider more organic routes to growth, depending on location and the characteristics of the market.
Over the last several years we have seen a desire to enter new markets through the establishment of a branch or subsidiary. South East Asia is a particular example of this trend, where low insurance penetration rates present an attractive proposition for insurers in mature markets experiencing modest growth levels. However, many jurisdictions in the region are characterised by a lack of obvious or appealing targets. Singapore is one such market where we have seen a significant uptick in interest from international re/insurers looking to set up shop and establish a base for wider access to markets across the region. In another example, Miami is emerging as a regional hub for Latin American and Caribbean re/ insurance business – attracting a number of international players who are drawn by its deep connections with and accessibility to the wider region.
Joint ventures (JV) with a local partner have long been a popular route to growth, especially in countries where there are limitations on the level of foreign participation. Overseas investors in the past have been prepared to take minority positions in a JV as a means of establishing a foothold in the market with the expectation that they would be able to build out their position at a later date. In some significant markets, such as China and India, the foreign direct investment limits have been raised and, as a result, there has been considerable activity in the last year by international insurance businesses to increase their shareholdings.
Lloyd's of London also offers joint venture possibilities, which are seen as an increasingly attractive way to enter a market that has a decreasing number of acquisition targets. Last year Beazley and Korean Re established a special purpose syndicate (SPS) at Lloyd's, which is supported by a two-way programme of reinsurance as well as employee secondment. Another recent example was Patria Re of Mexico teaming up with Pembroke. We expect this to be a continuing trend.
The other development we have seen this year is that, in response to the on-going difficult trading conditions, a number of larger insurers have taken a long-term bet to deploy venture capital into technology start-ups around the world. According to recent data from Accenture, insurance technology start-ups attracted USD 2.6 billion of investment in 2015, up sharply from USD 800 million the year before.
By expanding the scope of this report to go beyond M&A, we have explored some interesting trends in how insurance businesses are seeking expansion. With market conditions not expected to improve in the foreseeable future, there can be little doubt that we will see more businesses looking for creative answers to the issues they face in the next few years.
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Searching For Growth: M&A And Other Strategies
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