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Monte Carlo M&A Roundtable 2019

The drivers of M&A have changed from the days of Bermudian carriers uniting and of overseas strategic investors seeking entry into Lloyd’s.

Soul-searching among sub-scale Lloyd’s players and their owners, mushrooming run-off opportunities, a hunt for fee income, and for new technology, are among the forces expected to propel consolidation in the months ahead.

Meanwhile a gulf between carrier valuations and those of capital-lite brokers remains a key feature of the deal-making universe.

Those were among the conclusions of panellists on The Insurance Insider’s Monte Carlo M&A roundtable, in association with Lloyds Bank.

M&A activity in the year to date has been sluggish at best for non-life carriers, with Tokio Marine’s $3.1bn agreement to purchase Pure in early October a rare big-ticket transaction.

Broker deals have eclipsed non-life insurer deals, with Optis counting 490 M&A agreements in the sector in the first nine months in the US and Canada alone.

Acrisure led the acquirer pack in the period and as Acrisure CEO Greg Williams put it at the roundtable: “There are not many places you can get high recurring revenue, nice profit margins and low capex requirements.”

The wide pool of potential suitors – particularly among private equity (PE) firms – and continued availability of cheap debt from multiple sources look set to support broker valuations for some time to come.

The outlook is more mixed for MGAs, though they too fall in the “fee-income” basket of businesses that have hitherto been attractive. In the wake of underwriting-remediation drives such as that at Lloyd’s, some have seen their capacity abruptly curtailed.

That shortage of capacity could lead to distressed sales, Lloyds Banking Group’s Seb Kafetz predicted.

Carriers themselves are keen to purchase fee businesses such as MGAs as a way to diversify from their capital-sapping mainstay.

However, goodwill from these types of deals can act as a deterrent by eroding buyers’ tangible book value, particularly for those insurers trading at little or no premium in the first place.

Roundtable participants suggested minority-stake purchases as an accounting workaround that will allow the buyer to benefit from the fee income without the goodwill impact.

Meanwhile, the steady drip of transactions involving ILS fund managers, like Scor’s purchase of Coriolis Capital, looks set to continue.

The Florida market, meanwhile, looks set to become a rare pocket of carrier-to-carrier M&A, while return hurdles are likely to deter PE firms from all but the most lowly valued (re)insurers.

From that point, to activism.

Despite high-profile interventions – such as CIAM’s long-running campaign at Scor – healthy premiums to book value for the most part risk pulling the rug from under wannabe activists’ feet.

In the past 10 years, noted TigerRisk partner Jarad Madea, carrier multiples have doubled.

“While an activist can agitate and can be successful in certain situations, many times there may not be a strategic acquirer who is going to pay a premium on top of where the stock already is,” he told roundtable colleagues.

Aspiring Carl Icahns or Paul Singers, take note!

To view the Monte Carlo M&A Roundtable 2019, please click here.

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