Many experts predict that 2016 will be another active year for global insurance industry mergers and acquisitions. The companies fueling this activity view these deals as a powerful means for growth, especially since organic growth in a continuing soft market cycle is extremely difficult. A number of property/casualty insurers also have a desire to acquire companies with enhanced technology platforms in order to increase their distribution capacity and gain specialized expertise in areas such as data analytics, telematics, exposure aggregation management, technical underwriting and modeling. M&A has been shown to provide a fast way to improve in-house capabilities, while keeping new market entrants at bay.
To put global M&A activity into perspective, in a PwC survey of 1,500 global P/C insurance executives, 54% said their organization is very likely to take part in an M&A transaction on a buyer side within the next 12 to 24 months. That aligns with Dealogic’s M&A activity analysis, which reported that global M&A value in the first half of 2015 hit an eight-year high, second only to the all-time record set in 2007.
North America is particularly hot: The value of M&A deals involving U.S. companies in 2015 surpassed $1 trillion before the end of June—the first time in history that benchmark had been reached so quickly. M&A activity in the North American insurance market has seen a 61% year-over-year increase, with 217 completed transactions between July 2014 and June 2015, compared to 132 in the previous 12-month period. This pace is expected to continue well into 2017, most industry analysts say.
Despite the increase in M&A activity over the past few years, challenges abound. It is widely understood that M&As have attractive upsides, offering automatic growth for the acquirer and capital for the seller. Next to the banking industry, however, the insurance sector is perhaps the most highly-regulated in the world and is constantly subjected to numerous legal statutes, not to mention centuries of case law and constant political pressure. To ensure M&A success, participants must understand how to navigate those challenges.
According to Boston Consulting Group, only 46% of M&A deals that occurred in 2013 and 2014 created shareholder value for the acquiring company. Of course, reasons for such a surprisingly low success rate vary, but the study shows that one of the major drivers is the undervaluation of operational technology capabilities in such areas as compliance, actuarial, claims handling, policy/treaty administration and quantitative risk analysis, in addition to the resource expertise needed to facilitate those critical company functions.
In today’s M&A climate, deals may look financially attractive on paper for a multitude of reasons. But in more cases than not, the concepts of operational and resource management, as well as cultural disparity, are overlooked, not analyzed thoroughly enough or assumed to simply (or somehow automatically) take care of themselves. Nothing could be further from the truth. Those issues all pose real, discrete risks, and in addition to being carefully evaluated, they must be analyzed and nurtured in much the same way as those that affect the deal’s financial implications.
While new technology platforms can be developed internally, many insurers choose to forgo the necessary research and development in favor of acquiring those capabilities from software platform solution providers, especially in niche markets like specialty lines. M&A-targeted companies can generate high levels of market competition by first squaring away how they function from an operational standpoint. Once they successfully demonstrate that value, they are well positioned to widely open themselves up to the market for like-minded acquirers. This can contribute to ensuring the best possible fit.
Despite the sheer volume of recent M&A activity, there are signs pointing to a heightened scrutiny of these deals, which is a positive signal for all involved stakeholders. The challenges lie in the complexity of the deals and are not limited only to such things as jurisdictional tax issues and Solvency II implications, but also to how internal and external stakeholders are operationally equipped from a technology perspective to ensure a healthy and successful transition. When companies make an acquisition, it is critical to plan for synergies at all levels, in addition to making sure appropriate growth capital is used to realize expected gains.