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Record broker sales drive M&A activity

Global merger and acquisition (M&A) activity in insurance has picked up in recent months, driven by a record number of broking acquisitions and a better economic outlook, according to Swiss Re.

“There has recently been a surge in the number of M&A transactions in the intermediaries sector, to levels beyond those of the boom years of 2007/08,” the reinsurer’s latest Sigma study says.

There were 316 acquisitions of agents, brokers and insurance service providers last year, with an average value of $US261 million ($324.69 million), up from 271 and $US126 million ($156.75 million) respectively in 2008.

Overall insurance M&A activity has risen from low levels recorded since the global financial crisis, with 489 deals completed worldwide last year, compared with 674 in 2007.

The number of M&A announcements in the second half of last year increased to 359 from 295 in the first half, and that momentum has continued, with a few high-value deals such as UK life insurer Aviva’s takeover of Friends Life this year.

“Survey evidence also indicates sentiment towards M&A is turning as confidence about the economic outlook gradually improves and market participants look to acquisitions or mergers to boost profitability, as well as bolster their balance sheets,” the report says.

Wholesale brokers are pursuing expansion overseas in response to growing demand from large corporates that want to partner with businesses with international footprints.

The wholesale broking market is now more concentrated. In 2013, the top 15 broker companies accounted for 43.1% of global commercial non-life revenues, and in surveys last year 60% of UK brokers said they will consider a merger or are merging.

M&A transactions have increased in number and size as mid-tier brokers combine capacity to compete with giants such as Aon, Willis and Marsh, which are also making acquisitions.

Increased competition among insurers has also meant more activity in specialty (re)insurers.

The influx of alternative capital will continue to stimulate deals, especially if financial investors become active sellers as well as buyers, the report says.

Increased alternative capacity among hedge funds, investment banks and pension funds has put downward pressure on prices in some property and casualty lines, with specialist (re)insurers in Bermuda and Lloyd’s combining operations.

“What’s happening is a squeezing out of the middle-tier specialist (re)insurer,” Swiss Re Chief Economist Kurt Karl said.

Some businesses lack the scale or breadth of services to differentiate their offerings, and a “shakeout” is expected to continue as companies join forces to increase revenue and cut costs.

Some of the largest deals in the past year include XL Group acquiring Catlin for $US4.1 billion ($5.09 billion) and Fairfax Financial Holdings acquiring Brit for $US1.9 billion ($2.36 billion).

In January Axis Capital and PartnerRe agreed to merge to create an $US11 billion ($13.58 billion) reinsurer, but Italian investment group Exor has since made a $US6.8 billion ($8.36 billion) hostile takeover bid for PartnerRe.

In property and casualty, Asia-Pacific’s global share of M&A activity has more than tripled from 6% in 2001-07 to 22% in 2008-14. Japanese insurers have led activity at home and abroad as they diversify from natural catastrophe risk exposure.

The report says reinsurance is underutilised as an M&A capital management tool. It can help to strengthen or relieve pressure on insurers’ balance sheets before and after a transaction.

Report co-author Darren Pain says the track record of M&A success in insurance, as in other industries, is mixed.

“Those deals that seem to most consistently create value are ones where companies are from the same country and those that combine firms on different parts of the insurance value chain.”