History would suggest a steep decline in U.S. and Bermuda insurance carrier M&A activity in 2019 after an especially active 2018, but various factors may help partially arrest the seemingly inevitable slide.

S&P Global Market Intelligence projects a year-over-year decline of approximately 40% in the aggregate deal volume of insurance carrier M&A transactions from the 2018 total of $44.58 billion. That compares with an average rate of decline of 65% following the six most recent previous years in which annual deal volume topped $40 billion on an inflation-adjusted basis. The aggregate deal volume statistics exclude managed care targets and terminated transactions. S&P Global Market Intelligence does not cover reinsurance transactions as M&A unless legal entities and/or other assets change hands.

The amount of M&A activity involving U.S. insurance brokers and agencies, meanwhile, likely hit a new record in 2018 in terms of the number of transactions announced. And while the surge in activity fueled largely by private equity-backed consolidators sets a high bar, there are few indications of an imminent slowdown.

A banner year

Fueled by Axa's $15.39 billion acquisition of XL Group Ltd., the aggregate deal value of insurance carrier transactions involving a buyer or target based in the United States or Bermuda more than doubled year over year to $44.58 billion in 2018. Coming in slightly above our projection of $44.25 billion, it was the second highest annual tally in the past two decades when unadjusted for inflation and the fifth highest in that stretch on an adjusted basis.

Blockbuster transactions akin to the combination of Axa and XL remain relatively rare, however, and our 2019 outlook does not anticipate the recurrence of a deal of that magnitude. There were only two other insurance carrier M&A transactions fitting the aforementioned criteria in the past decade with announced values in excess of $10 billion: ACE Ltd.'s 2015 agreement to acquire Chubb Corp. for $28.29 billion in the transaction that resulted in the formation of Chubb Ltd. and American International Group Inc. $15.55 billion divestiture of American Life Insurance Co. and affiliates to MetLife Inc. under a 2010 agreement.

When excluding Axa/XL from the 2018 tally, our 2019 forecast would imply a year-over-year decline of only 8.3%.

Activity in 2018 also benefited from the timing of the implementation of U.S. federal income tax reform in late December 2017. Market participants attributed an especially sluggish period for M&A activity in advance of enactment to uncertainty surrounding whether — and in what form — a tax bill would pass. Aggregate deal volume increased 51.3% from 2017 even when excluding the Axa/XL megadeal. It soared by 131.1% when including that transaction.

On the other hand, many of the same dynamics that led to our optimism about the pace of activity in 2018 remain in place. Among them are inbound interest from international acquirers, consolidation involving Bermuda-based companies, the pursuit of return-enhancing block transactions involving runoff business, acquisitions of technology-focused entities, and a desire to add differentiated capabilities. Recent events such as the unprecedented series of fourth-quarter 2018 wildfires in California and the resulting failure of a previously A- rated carrier may only serve to reinforce the importance of geographic diversity and enterprise risk management that a larger organization may be better positioned to deliver.

Some small- and mid-sized carriers will continue to look to M&A as both buyers and sellers. In some instances, they may pursue nontraditional M&A such as mutual-to-stock conversions or engage in intercompany mergers in search of greater flexibility and efficiency in an evolving marketplace.

Billion-dollar deals fuel P&C surge

The Axa/XL deal caused 2018 to be the second most active year for P&C M&A in the previous two decades, unadjusted for inflation, behind only 2015. Of the 12 insurance carrier deals valued at $1 billion or more in 2018, eight involved P&C targets.

Companies engaged in the reinsurance business were popular targets. Not only did Axa acquire XL, RenaissanceRe Holdings Ltd. agreed to buy Tokio Millennium Re AG, American International Group Inc. acquired Validus Holdings Ltd. and Apollo Global Management LLC agreed to purchase Aspen Insurance Holdings Ltd.

Specialty P&C carriers Infinity Property & Casualty Corp. and Navigators Group Inc. agreed to sell to Kemper Corp. and The Hartford Financial Services Group Inc., respectively. AmTrust Financial Services Inc. was taken private.

Life holds steady

Aggregate deal value of $8.98 billion for targets primarily engaged in the life, annuity and accident and health business exceeded the 2017 total of $8.45 billion thanks to a rally late in the year. In addition to Horace Mann Educators Corp.'s December 2018 agreement to acquire National Teachers Associates Life Insurance Co. for $405 million, another fourth-quarter transaction involved Resolution Life Group Holdings LP agreeing to acquire the AMP Life business of Australia's AMP Ltd. S&P Global Market Intelligence valued the acquisition by Bermuda-based Resolution Life at US$2.34 billion.

The largest two deals of 2018 involving U.S.-based targets were Liberty Mutual Holding Co. Inc.'s sale of Liberty Life Assurance Co. of Boston in a two-part transaction with Lincoln National Corp. and Protective Life Corp., and Western & Southern Mutual Holding Co.'s agreement to purchase juvenile life insurance provider Gerber Life Insurance Co. in a transaction that attracted particular attention for its high relative valuation.

Two of the year's more intriguing transactions did not meet the aforementioned criteria for M&A coverage but still highlighted two longstanding catalysts for deal-making: the transfer of in-force books of business and interest from international acquirers. Resolution Life in September reinsured $5.7 billion of statutory reserves associated with certain Symetra Life Insurance Co. annuity business. Japan Post Holdings Co. Ltd. announced in December 2018 that it would acquire a minority stake in Aflac Inc. and significantly broaden an existing relationship with the Japan-focused supplemental health insurer.

Broker/agency bonanza

Though the number of deals involving targets classified as U.S.-based brokers and agencies had not quite reached the 2017 record of 570 as of this article's publication date, it is virtually certain that the 2018 transaction count will ultimately top the year-earlier level. S&P Global Market Intelligence learned of 24 of the 2017 deals on Jan. 22, 2018, or later through sources such as regulatory filings and adviser surveys; the tally for 2018 activity as of Jan. 10 stood at 565.

Private equity-backed buyers accounted for 56.6% of the deals announced in the sector in 2018, which also represents a new high. Publicly traded brokers Arthur J. Gallagher & Co., Brown & Brown Inc. and Marsh & McLennan Cos. Inc. had their most active year for broker/agency acquisitions on a combined basis since 2012. Conversely, banks and thrifts accounted for only 19 acquisitions in 2018, which represents a new low for those types of buyers since S&P Global Market Intelligence began covering insurance M&A in earnest in 1997.

The confluence of the expiration of a 15% tax rate on long-term capital gains in 2012 and the influx of private equity-backed consolidators into the industry has caused average annual deal count to increase by upwards of 71.7% between the seven-year period ended in 2018 and a comparable stretch from 2005 through 2011.

Higher prices paid relative to targets' earnings before interest, taxes, depreciation and amortization, or EBITDA, has contributed to a steady supply of sellers while buyer access to the leveraged capital markets has helped stimulate demand. Those buyers who may not be willing to compete as aggressively on price have had success in pitching what they present as unique cultures to prospects.

One development that could impact M&A activity in 2019 is potential uncertainty surrounding the future ownership of AssuredPartners Inc. as current private equity backer Apax Partners Inc. reportedly plans to auction off its stake in the company. AssuredPartners has emerged as one of the most active acquirers in the business, with 33 deals to its credit in 2018.

On the other hand, Arthur J. Gallagher Chairman and CEO J. Patrick Gallagher said during a December analyst meeting that his company's M&A pipeline, with targets across various geographies representing approximately $500 million in annual revenue in play, was "stronger than it's ever been."