Hurricanes Harvey, Irma, Maria and Nate broke records in late 2017 in terms of damages and insured losses. The strains they have caused on the marketplace could spur a wave of M&A activity a after long lull, a Clyde and Co. analyst said.
“Add into the mix this year’s devastating hurricane season, the losses for which are still being worked out but will certainly run into the tens of billions of dollars, and we expect a number of insurance businesses will see their balance sheets come under increasing strain,” writes Andrew Holderness, the London-based global head of Corporate Insurance Group for Clyde & Co. “This could serve as a trigger for a wave of M&A in 2018 as [insurers and reinsurers] look for partners to help absorb these losses or consider putting their businesses up for sale.”
Holderness’ comments are part of an ongoing series of 2018 insurance industry predictions Clyde & Co. plans to be releasing throughout December.
Cumulative net catastrophe losses for reinsurance companies from Harvey, Irma and Maria, along with the Mexico earthquakes, are between $20 billion to $25 billion out of an overall industry loss of $90 billion, A.M. Best said recently. Morgan Stanley estimated in late September that Q3 insured losses from Harvey, Irma, Maria and the Mexico earthquakes could surpass $100 billion once final tallies are in (Nate struck in early October).
Beyond natural catastrophe costs, Clyde & Co.’s Holderness said that investment returns and “abundant liquidity” are also putting continued pressure on restarting merger and acquisition activity.
“Investment returns remain under pressure and will likely remain so for some time, despite the interest rate rises in the U.S. and UK—the first for a decade,” he said. “Meanwhile, abundant liquidity in the market means there’s little room for insurers to differentiate on price.”
Holderness added that “the rise of broker facilities and an increasing number of managing general agents entering the market is putting additional pressure on insurers.”
If natural catastrophe-related costs could spur a wave of new M&A deals, then what has been dampening M&A activity in the first place? Holderness blames overall uncertainty caused by factors such as Brexit.
“In some markets—notably Europe—uncertainty persists with Brexit acting as a significant break on M& Activity,” he said. “Transactions have been overtaken on the corporate agenda by Brexit preparations as companies realize that there is now no time to lose.”
Source: Clyde & Co.