The environment for insurance mergers and acquisitions (M&A) remains “hot” and Australia is expected to attract more deals and start-up activity, according to Clyde & Co.

The UK law firm’s annual review of insurance M&A activity says there were 225 deals worldwide in the first half of this year – the busiest six months for three years.

Global Head of Corporate Insurance Andrew Holderness says the upturn began in the first half of last year.

Excess capital was previously deployed in share buybacks, but “there has been a shift in market sentiment towards deal activity that can deliver diversification, geographic reach and cost savings”.

Mr Holderness says the search for growth is paramount, especially for insurers whose domestic markets have stagnated.

Japanese insurance giants are looking to Europe and the US, European insurers are exploring opportunities in Asia and Africa, and nine of the 10 largest transactions involving Asia-Pacific acquirers during the review period had foreign targets.

“By contrast, businesses based in dynamic emerging markets such as China’s Fosun and BTG Pactual of Brazil are making significant moves into mature markets to acquire assets that can fuel their international growth ambitions,” Mr Holderness said.

In Australia six deals were completed in the year to June. Among them, IAG acquired a stake in Asuransi Parolamas of Indonesia, Allianz bought the general insurance business of the government-owned Territory Insurance Office, and Munich Re acquired the general insurance operations of Calliden.

“Despite the fact Australia is already a very competitive and mature marketplace, we are seeing an uptick in interest, with a number of foreign investors trying to come into the market by virtue of acquisition or start-up,” the report says.

It cites Berkshire Hathaway Specialty Insurance opening an office in Sydney in April, followed two months later by Berkshire Hathaway’s acquisition of a 3.7% stake in IAG and its formation of a 10-year 20% quota arrangement across IAG’s consolidated insurance business.

“That an operator of this size and reputation should make such a significant move demonstrates a commitment to the country based on an underlying confidence that is likely to serve as a catalyst for others to follow,” the report says.

Clyde & Co believes there is “considerable potential” for further M&A and start-up activity in Australia.

“In terms of deal-making, we expect some intra-group reorganisations as (re)insurers look to streamline the number of licences they have for capital efficiency purposes.

“In addition, buyers will continue to look to acquire distribution channels or partner with intermediaries.”