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Insurance M&A momentum set to continue: Clyde & Co

US tax reforms will spur M&A transactions in the US and Bermuda this year, while Brexit malaise could benefit Asian deal-making, according to lawyers at Clyde & Co.

The lawyers were speaking after the release of the firm's 2018 M&A growth report. The report found the number of completed insurance sector M&A transactions fell by 9.6 percent last year to 350, of which 105 were cross-border.

However, US activity accelerated in 2017, with the number of completed deals rising by 6.7 percent to 176.

Globally, in the second half deal numbers rose by 5.9 percent year on year to 180, reversing a two-year downward trend.

Andrew Holderness, Clyde & Co's global head of corporate insurance, said: "After a lacklustre couple of years for transactions, this rise in activity indicates a renewed level of confidence in deal-making as a tried-and-tested route to growth."

New York-based partner Vikram Sidhu predicted that the boost US carriers gained from the reduced 21 percent corporate tax rate would spur deal-making, together with the erosion of the tax advantage of Bermudian players.

He added: "We have relentless pricing pressure in most lines of business that has not gone away."

After the third quarter catastrophes alternative providers showed that they were here to stay and that has provided a further impetus for small to medium-sized companies to consider strategic options, he said.

Sidhu also noted that insurers' release from the reality - or the spectre - of being designated a systemically important financial institution (Sifi) has given them more room for manoeuvre.

AIG in October had its Sifi status revoked, while the US government in January abandoned a fight to keep MetLife's Sifi - or "too big to fail" - tag.

Sidhu also predicted a reduced use of debt to finance transactions as interest rates in key economies rise.

In Europe, Holderness said Brexit uncertainty had "put a lid on transactions that would normally be coming down the pipeline".

But he added: "At some point that pressure valve will be released when there is a clearer line of sight about how businesses will operate after Brexit."

Last year in Europe M&A transactions by number fell almost 22 percent to 118, the second-biggest regional drop after Asia Pacific.

But Holderness suggested that Axa's $15.3bn takeover agreement with XL, SoftBank's interest in a minority stake in Swiss Re and speculation about Allianz as a buyer underscored M&A as a live theme in the region.

He also noted an increased push for diversification across the (re)insurance sector as a deal driver.

"We are getting to a world where companies need to cover all bases," he said. "The pendulum has swung from the early days of Bermuda monoline carriers."

In Asia transaction volume fell 42 percent to 42 in 2017 because of foreign exchange issues and heightened regulatory scrutiny of Chinese cross-border purchases.

But Holderness said strategic insurance transactions involving Chinese carriers remained on the agenda, as evidenced by Chubb's 10-year cooperation deal in November with PICC.

South Korea could be another source of outbound deal-making, he noted, while Japan's "big three" carriers are likely to continue to seek targets.

The law firm predicted Asia may gain an M&A boost from Brexit uncertainty in Europe, with Malaysia and Indonesia likely to benefit from a perception that deals can get done in those markets.

Meanwhile, Clyde & Co partner Nigel Brook predicted continued growth in InsurTech financing.

InsurTech funding rose 36 percent to $2.3bn in 2017, according to a recent Willis Towers Watson report.

"The pace is forced," said Brook. "There is a real danger of being left behind if insurers don't make an investment."

Investment to date has focused on the front-end, with personal lines carriers trying to improve the customer experience.

The Clyde & Co report found that tech companies including Google and Amazon are well positioned to strike out in insurance.

Brook said: "Their own customer base will be the natural place to start. They will be interested in risks that can be automated. For larger commercial risks, customers expect something more bespoke."

Brook said InsurTech-focused MGAs could be a focal point for deal-making by either private equity or mainstream carriers. Such businesses may opt to fund their own expansion, however, potentially through cryptocurrency financings knowns as initial coin offerings.

Clyde & Co said about 300 MGAs wrote more than 10 percent of the UK's £47bn ($65.2bn) of general insurance premiums last year and accounted for 47 percent of Lloyd's premium.

Percentage of deals by region
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