INsurers are turning to merger and acquisition (M&A) in their search for profit, a report by A. M. Best has shown.
The report, was made available to The Nation in Lagos by the firm’s Director, Market Development & Communications, Dr. Edem Kuenyehia.
- M. Best, a global rating agency, stated that insurers were finding it difficult to meet their targeted returns, no thanks to poor underwriting performance and investment returns.
It disclosed that the M&A market has been active in recent months, a trend, which A. M. Best expects to continue.
It cited American International Group, which has announced plans to buy Validus Holdings, andAXA has unveiled its intention to acquire XL Group.
Also, SoftBank has been contemplating taking a minority stake in Swiss Re. In addition, some groups are set to dispose of Lloyd’s operations, notably Sompo Holdings, which sold Canopius AG, to a private equity consortium and The Hanover, which is exploring a sale of Chaucer.
Bolt-on deals have included Zurich, entering into an agreement to acquire Australian insurer QBE in Latin America and Qatar Reinsurance Company buying Markerstudy’s Gibraltar-based insurance companies, it added.
The agency said: “Drivers contributing to the recent merger and acquisition activity include the perceived need to build scale and relevance, particularly in the reinsurance sector, which remains under pressure from alternative capital. The soft market conditions are making it difficult to generate strong underwriting returns, and the low interest rate environment is hindering companies’ ability to obtain acceptable yields from investment portfolios.
“Smaller operations have typically been sold to peers with a stronger presence in a particular market, with buyers seeking to enhance their profile and performance. Furthermore, where companies have identified potential challenges to the sustainability of existing markets or business models, for example from technology, they are looking to diversify to reduce their exposure to these threats. In particular, changing distribution practices have made companies with either data driven technology or a focus on less commoditised specialty business attractive.
“Some insurers are taking advantage of relatively inexpensive borrowing to finance deals, while in other cases; M&A represents a means for cash rich buyers to deploy excess capital. A.M. Best notes that private equity backed buyers are especially active as they have excess capital and fierce competition between these participants are driving price multiples higher.”
Post-acquisition strategies
A.M. Best notes there are various strategies deployed in post-acquisition and that they are related to the original motivation for the deal.
“For example, when similar businesses merge, the intention tends to be to increase scale and relevance in existing markets; therefore, the focus is on realising expense synergies and economies of scale. There will also be an effort to minimise any loss of business, but at the same time ensure that where there is overlap, exposures remain within tolerance. A.M. Best believes that this type of consolidation can be positive as it tends to enhance the position of the company in the insurance value chain, although there are obvious risks associated with execution.’’
It continued: “In cases where the business of the acquired entity differs considerably to that underwritten by the buyer, the acquired management team is usually kept in place. This has been evident over the past few years in deals involving large Japanese groups buying London market or Bermudian entities. The acquired entity is also more likely to maintain a significant degree of independence. This can allow the takeover target to retain some of the advantages of being a smaller organisation – for example, it can be nimble and potentially more innovative, while benefiting from parental protection and access to the parent’s often large capital base.
“Finally, in situations where the acquirer is looking to accelerate growth in a market where it has a small presence, the acquired entity is more likely to retain its own identity and brand motivations and likely patterns in future deal-making
“A. M. Best expects the drivers and market dynamics behind recent deals to remain and that consolidation will continue, particularly for smaller insurers, as it becomes increasingly difficult to achieve acceptable returns on capital. As retail business and the smaller end of the commercial market become increasingly commoditised, largely due to the increased use of technology, companies that have access to and the ability to underwrite more complex specialty business are proving attractive.
“Additionally, data and analytical capabilities are becoming more important; therefore, companies that add value here are likely to become takeover targets. Other qualities that make an insurer desirable include strong management teams, diversifying portfolios and associated capital efficiencies, as well as access to business and technology.
“Buyers will seek to avoid potential unforeseen legacy issues and exposures that are outside their risk appetite. Challenges in the M&A environment are diverse and include overpaying, which could erode shareholder value, as well as execution risk on the integration of staff and systems, potential loss of talent and the alignment of different cultures,” it stated.