Predator or prey: are you ready for a renewed wave of M&A?

Pressure for insurance M&A continues to build. What are the key drivers for the latest round of deal activity and what are the implications for both boards and people within the organisation?

Recent years have seen a series of mega-deals within the UK and wider European and global insurance markets. While other such deals could follow, we’re also likely to see a step-up in smaller and more targeted transactions as insurers look to hone their capabilities and sustain relevance in a fast-evolving marketplace.


 

1/ Pressure to boost returns

Insurance worldwide is awash with capital, which has the potential to drive down return on equity, creates pressure to put surplus capital to work and heightens the competition to deliver attractive returns for shareholders.

In the past, the impact of Harvey, Irma and Maria from such an exceptionally destructive hurricane season would have depleted capital and reset the capital dynamics. However, the current consensus within the industry is that the losses from the 2017 windstorms will result in reduced earnings, rather than requiring companies to tap into their capital. And even if the 2017 season does require some to raise capital, this would be cheap and readily available.

With capital still abundant, M&A is set to play a key role in boosting returns, both in creating the efficiency savings needed to drive down costs and in generating greater profitability through increased customer reach, earnings diversification and dynamic pricing.

2/ UK a hot global target

Good returns and a favourable exchange rate are attracting overseas buyers. In particular, Lloyd’s has posted a healthy 8-9% return on capital over the past two years, and despite this being driven by prior year releases and investment returns rather than underwriting results, Lloyd’s remains an attractive investment. While UK insurance is a mature investment, this continues to be an innovative and dynamic market capable of creating new opportunities for customers and investors.

Capital-rich conglomerates in Asia and the Middle East are keeping an especially close eye on UK targets as they look to either gain an initial foothold or expand their presence in the insurance market. The key objectives aren’t just returns here in the UK, but also acquiring skills and knowledge that can be transferred to their home markets.

3/ Innovate to stay ahead

Technology isn’t just bringing down costs and opening up new distribution channels, it’s also reshaping customer expectations and creating opportunities to boost the precision and effectiveness of risk analysis and protection.

As an insurer, it’s important to gauge whether you have the systems, capacity for innovation and associated talent to keep pace. If in-house development is likely to be too slow to bring you up to speed, acquisition offers a faster alternative. Potential targets include both InsurTech start-ups and established insurers that are leading the way in the areas you’re looking to develop.

4/ Solvency II disclosure spotlights weaknesses

The new solvency and financial condition reports (SFCR) will intensify the spotlight on capital inefficiencies by providing more detailed information about exposures and associated capital demands. Buyers are looking for targets that they believe they could manage more efficiently or for better performing firms to overcome weaknesses (e.g. opportunities for diversification).

Risk of being left behind

Together, these drivers of change and acquisition are creating a new playing field within the insurance market. And there’s more to this than just consolidation and scale. Acquiring talent and technology could be just as important in sharpening efficiency and meeting changing customer demands.

The big question is are you prey, predator or, in some instances, both? Many businesses are putting out feelers to each other. Wait too long, and you could find that the most suitable partners are gone or your bargaining position is weakened as the flow of business recedes – a merger of equals it won’t be.

And the deal surge isn’t just a consideration for the board. It’s also important for finance, actuarial, claims and other teams across the organisation to look at what differentiating capabilities they can offer a merged group and avoid being deemed surplus to requirements in plans for synergies and savings. What are your selling points, individually and as a team? How could they be accentuated and articulated to boost the value you deliver to your current organisation or a potential acquirer? What are your weaknesses and how can they be addressed? This will in turn require clear and actionable plans for upgrading talent, technology and organisational design within your team or division.

I will be looking in more detail at each of these drivers and how to deal with the strategic and organisational implications in a series of postings over the coming months.

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Yowshern Lau
Associate director
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