After a brief hiatus during 2020, M&A activity in the UK insurance industry has rebounded and continues to remain robust. As consolidation in the global insurance sector continues, investor sights have been set on the UK industry where market factors have aligned to present unique opportunities for transformational deals.
According to a 2018 report from Statista, the UK insurance market is the largest (As measured by total written premiums) in Europe, and a world leading insurance services export market. While there are a number of large players in life, health and general insurance, the UK insurance distribution segment remains highly fragmented, offering up opportunities for vertical integration. The nature and size of the market makes acquisition of UK insurance companies a key steppingstone for international expansion at scale.
Following Brexit, certain UK players have opted to pursue a domestic focus and have planned to exit foreign markets amid tighter scrutiny of underwriting practices. For example, conditions in some Asian insurance markets have proved challenging because of, among other reasons, ageing populations, differing consumer expectations, or large complex risks (e.g., cybersecurity risks or natural catastrophes) that require different approaches to underwriting. The clarity of strategy from exiting such markets has, in part, given rise to the perception of better risk management and is likely to be seen as value-enhancing by potential investors.
Attractive prices and returns
Another key driver of investors’ recent interest in UK multi-line and property& casualty insurers is the opportunity to acquire insurers at Price-to-Book Value (“P/BV”) multiples that were close to 10-year lows throughout 2020, with share prices having been slow to rebound despite return on equity (“RoE”) not being significantly affected by the Coronavirus pandemic (“Covid-19”). Covid-19 also sparked strategic reviews around which products to underwrite, in which markets, and could also be lead potential suitors to perceive value enhancement. The strength of the British pound also played a part with the exchange rate remaining below 1.3 USD to 1 GBP for much of 2020.
Source: KPMG Analysis of selected UK Insurers as at June 2021, S&P Capital IQ
Source: KPMG Analysis of selected UK Insurers as at June 2021, S&P Capital IQ
As can be seen in the charts above, the RoEs have been flat since 2018 following a softening market. That being said, there is emerging evidence that pricing is improving, and the insurance market is heading towards a hard market. This has contributed to the attractiveness of the UK market, but also enticed new entrants who are able to operate in a much more nimble manner compared to legacy businesses.
From our experience in the deal market, we have noted that acquirers of UK insurance businesses have a strategic ambition to expand geographically beyond their current footprint as well as to rationalise costs and generate value.
Capital has become a key commodity
Indeed, given the persistent low interest rate environment in the UK and thus subdued investment returns, there continues to be a focus on not only operational efficiency, but capital efficiency as well (e.g. through capital efficient product innovation, or achieving capital efficient returns by investing in higher yield alternative assets). For all the reasons mentioned above, the UK presents buyers with a unique opportunity for such expansion without introducing unforeseen risk, and hence overly onerous capital requirements. Conversely, from the sellers’ perspective, divestment of insurance assets allows freeing up of capital and realisation of investment returns.
Good price. Good value?
In their pursuit of good deals, market participants need to have a good grasp on value drivers beyond multiples and earnings. Increasingly, operational and capital efficiency plays a key role in the ability for acquirers to create value, and sellers to realise value. Strategies on digitisation, vertical integration, cost rationalisation, data-driven underwriting and risk management (including managing Environmental, Social, and Governance risks and opportunities) are what ultimately will set apart good value from good price.
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