How is the recession affecting insurance mergers and acquisitions? The picture is starkly divided: while larger transactions are at a 10-year low, smaller transactions are holding up and consolidation continues, reports Jim Keeling in his survey of the first quarter

The last quarter of 2008 saw an upturn in deal activity in the insurance sector with some significant transactions getting across the finishing line. Among these were Aon’s £900m acquisition of Benfield and the £700m purchase of Barclays Life by Swiss Re. The pace seemed to be picking up after a very slow summer. But the question on everyone’s mind was whether deal-making would be maintained into the new year.

The answer for larger insurance deals is a resounding no. A recent report by BDO Stoy Hayward showed sales of UK private companies at a 10-year low across all sectors, and larger deals seem to have taken this trend to heart.

Our charts, produced by Corpfin, show deal activity divided into transactions above and below £40m, in each case only including those where the amount paid has been publicly disclosed and the buyer or seller has operations in the UK. Up to the end of 2008, there were only two quarters showing no larger deals – one of these quarters spanned summer 2008 and the other was back in 2003. But now we have a third zero quarter (without a single deal) in the quarter just finished. So the past nine months show a truly exceptional downturn in deal activity, including two out of only three zero quarters seen in the past 10 years.

The picture is a little steadier for smaller deals – that is, those with a value of less than £40m. Remembering that the charts exclude deals where value is not disclosed, in the first quarter 2008 they recorded just six transactions with a total value of £60m compared to an average over the 10-year period of around 7.5 deals at an aggregate value of £80m per quarter. So this shows smaller deals are near to holding their own, although the picture is bleaker if we look at all deals including those where values are not disclosed. The first quarter 2009 total of 20 compares to an average of 33 per quarter across the 10 years. Nevertheless, by comparison with their larger cousins, smaller deals are holding up.

A key factor is that, despite a difficult funding environment, consolidation among brokers continues. Acquisitions have, for example, been completed by each of Giles, Oval and CCV.

Perhaps more importantly, though, there seems to be the beginning of some optimism among funders. A recent survey by the journal Unquote, which monitors buyout activity, showed an expectation of an increase in deal numbers reflecting valuations coming into line with the current economic conditions. Most people surveyed said they believed growth will return to the UK economy before 2011 and that, contrary to some reports, debt funding is already available for the right transactions.

The key to making the most of the current climate is to establish where to find the opportunities. A good source, and one that in our view is already emerging, is larger groups that are suffering in the downturn.Their owners are demanding they find ways to pay down debt, an obvious route to which is selling off peripheral divisions. Each sale is an opportunity for a new business to be born into the hands of the waiting entrepreneur. The result is often a management buyout, such as the recent acquisition of Hastings Insurance by its management team. Many such new businesses – arising like a phoenix from the ashes of recession – will be the great success stories of the next decade.

Jim Keeling is joint chairman of Corbett Keeling, which advises on funding buyouts and selling insurance businesses.