2017’s record-level losses from natural catastrophes and other growing market pressures could act as a catalyst for M&A activity in the U.S. insurance industry next year, according to Clyde & Co. Analysts said M&As had taken something of a back seat in the insurance industry over the last 18 months, but changing factors in the market environment, such as increased rates in loss-affected lines, cuts to corporate tax rates, and development of InsurTech start-ups have made it likely that insurers place a renewed focus on acquisitions. Clyde & Co said that after a year of heavy losses “we expect a number of insurance businesses will see their balance sheets come under increasing strain. “This could serve as a trigger for a wave of M&A in 2018 as re/insurers look for partners to help absorb these losses or consider putting their businesses up for sale.” On the other hand, if pricing pressure decreases due to rate hikes in loss-affected lines, it could give firms the capacity to focus on strategic M&A activity. The InsurTech revolution is expected to be another driver of acquisitions, as re/insurers hunt for start-ups with a proven track record of success to fill the need for strategic innovation. In addition, Clyde & Co noted that abundant liquidity in the market means “there’s little room for insurers to differentiate on price. And the rise of broker facilities and an increasing number of managing general agents entering the market is putting additional pressure on insurers.” In Europe, the uncertainty created by Brexit had placed a significant brake on M&A activity – with firms choosing to focus on Brexit contingency plans. However, Clyde & Co expects that in 2018 a difficult trading environment where investment returns remain under pressure will mean that growth remains a priority. Re/insurers could come under additional pressure from alternative capital gaining a larger proportion of market share through expanding beyond current lines of business and into new areas, analysts believe this could result in additional pressure on pricing in which some businesses are put up for sale. However, Clyde & Co analysts cautioned that with growing geopolitical instability, a recession, a fall in the stock markets, global political conflicts or other negative global events could potentially override the factors above and put a chill on insurance M&A in 2018.
Having all but evaporated in the past 18 months, mergers and acquisitions could make a comeback within the reinsurance space during 2018, according to Clyde & Associates.