Deal value optimisation: Focusing on the fundamentals

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The gathering pace of M&A is transforming the competitive dynamics within the insurance industry. How can your business ensure it has the scale, reach and technological capabilities to compete? How can you optimise value from acquisition and integration on the one side and separation and sale on the other?

In a post at the end of last year, I looked at the forces driving the acceleration in insurance M&A and the risks of being left behind.

In the subsequent months, we’ve seen that no deal is too big or too small in a market that doesn’t just require scale to compete but also the talent and technology to innovate and differentiate.

The threshold for competitive scale is no longer just a matter of market reach and cost to serve, but also the availability of sufficient funds to invest in robotics, predictive analytics and other key elements of digital transformation. Insurers that lack the necessary cash may look for merger partners that do.

Ready for market

As the M&A drivers come together, what are the key considerations for your business and what are your options?

At the lower end of the M&A value range, more and more non-core and subscale operations are coming up for sale. We’re even seeing whole firms being prepared for sale as the need to inject investment into the business becomes ever more pressing.

At the megadeal end of the market, relatively large property and casualty (P&C) groups that had been the products of an earlier wave of mid-market consolidation are now themselves being targeted and swallowed up by an increasingly powerful set of industry giants.

As with any such market shake-up, there are opportunities to emerge leaner, stronger and better equipped for the future. There is always a tendency to concentrate resources on the growth areas of the business. Yet, a key part of success in this market will be optimising the operations earmarked for divestment and readying them for clean separation as you seek to attract multiple offers and maximise the sales price.

Ready to capitalise

So, how can your business put itself in the best position to boost your competitive potential and take advantage of the opportunities for acquisition and sale?

The core fundamentals are paramount – underwriting, pricing, portfolio management, reserving, capital management, claims and costs. A clear sign of this has been the recent results within the

Lloyd’s market. While the overall combined ratio was 114% in 2017, there was a wide range of results across the market. Our analysis reveals no discernible correlation between size and profitability. Rather, the best performers were marked out by superior management of the fundamentals in areas ranging from sharp risk pricing to freeing up funds for growth. And with

London Market businesses set to be one of the main M&A targets, optimising these deal value fundamentals will be crucial in boosting prices for sellers and delivering the post-deal uplift for acquirers.

The insurers that are in the strongest position to respond have adopted a deal value mindset across the organisation, rather than leaving M&A to a few dedicated personnel. Actuaries are at the forefront of this strategic push. Their crucial input includes a close understanding of what drives the value fundamentals and the interactions between them (e.g. changes in market environment, risk and capital demands). Actuaries provide a bridge between the reality on the ground and board-level decisions on strategic direction and M&A.

The key to the effectiveness of this actuarial input is recognising that this isn’t just about verifying the adequacy of capital and reserves, but understanding the dynamics of the value fundamentals and optimising the results.

Actuarial teams at the forefront of decision making

The result is likely to be a broader and more collaborative role for actuarial teams. When working with the business, it is important for actuaries to focus on the commercial impact of their evaluations. As part of this, they should be ready to express a strategic view or put forward hypotheses to help guide business decision making.

This will in turn demand a strong commercial mindset. It will also require the advocacy and engagement needed to gain organisation-wide recognition of actuaries’ key role in navigating through this market shake-up and ensure they are at the heart of deal-making right through from strategy to due diligence to post-merger integration.

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Yowshern Lau
Associate director
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