The re/insurance sector remains ripe for further consolidation, driven by a search for economies of scale at one end of the spectrum and the desire to innovate and embrace technology at the other, James Ferris of PwC tells Bermuda:Re+ILS.
What are the strategic drivers for M&A in the reinsurance market?
The main strategic drivers for buyers are scale and diversification, but we are also seeing huge interest in activity driven by technology and insurtech. Reinsurers and intermediaries are both exploring strategic deals that enhance their capabilities around things such as data analytics and the use of blockchain technology.
We have yet to see how the COVID-19 pandemic may impact transactions, but as interest rates reduce further, it’s likely to drive a great search for economies of scale as returns remain low, albeit there is some pricing improvement. We also expect opportunistic transactions from those with the funds to acquire.
Focusing on other strategic drivers, the technology-driven activity often seems to be a world of buzzwords, but data analytics, blockchain technology, apps—they are all driving activity. A good example is Aon’s acquisition of CoverWallet, the digital insurance platform for small and medium-sized enterprises (SMEs). The deal gives Aon an alternative access route to the SME market via a technology solution. That is good for all stakeholders.
Insurtech is a global phenomenon but Bermuda is seeing enhanced interest because of things such as the sandbox and innovation hub the Bermuda Monetary Authority (BMA) has introduced. The BMA wants to encourage companies to innovate in Bermuda and as these companies grow, they need capital and scale and that drives deals with larger companies.
Another strategic driver of deal activity comes from companies looking to exit geographies or certain lines of business. Some companies are looking to divest non-core operations. In Bermuda in particular, that is leading to a growth of run-off players in the life and non-life sectors.
What is creating deal flow in the market?
As mentioned, many buyers have the usual objectives you associate with M&A, including seeking scale and cost-savings and ultimately improving shareholder returns.
An interesting driver that is becoming more prominent is technology-driven deals. Smaller startups are developing products that are clever and niche, but can be difficult to rapidly scale. Being acquired by a bigger player gives rapid growth opportunities and we see that happening in the market globally.
For many insurtech companies, that may be their business plan from the start, as their seed investors will be looking for an exit within a certain timeframe and many re/insurers are willing to pay a premium to secure the right technology to reduce the cost of operations or improve access to markets.
How do buyers ensure they obtain the value they are seeking?
In terms of strategic transactions, buyers focus on the value of what they are acquiring (be it books of business, scale, markets, skills, etc)—and ensuring they do not destroy that value. Maintaining
value comes down to culture and good integration strategies. If you have an insurer that is very hierarchical, for example, and it buys a company that is very nimble and flexible with a flat management structure, there is a risk that value can be destroyed if integration
is done incorrectly.
It is important to have a very clear value creation plan from
the moment you start the due diligence. It is important to think carefully about how you intend to integrate the operations and technology. You need to understand how that will work and plan for it accordingly.
You also need to think carefully about how you integrate people from different teams. Poor people-integration risks destroying value.
Technology is increasingly being used to automate more and more tasks—anything labour-intensive. They want to focus on adding value rather than manipulating data but again, buying and integrating technology companies into your business needs to be performed correctly to ensure you maintain good morale and value in the existing business.
How do sellers maximise the value achieved for shareholders?
Sellers will be looking for an acquirer that seeks to maximise the value in that business (this is where niche players do well). I would recommend getting good advice early on.
Most management teams have little experience of selling a business so getting good third-party support early in a deal can make a big difference. That can ensure they are as ready and prepared in as a robust a way as possible for the due diligence process. Lack of preparation can have a significant impact on the ultimate sale value.
Often in insurance the real value drivers will be related to people and relationships. Getting mechanisms in place to tie key employees to your business will be very important. Equally, you want to be addressing any value-destroyers. It is worth looking at things such as tax structures, staffing structure, third party agreements due to expire, etc. It is also worth ensuring that accurate and timely data and financials are easily available for buyers.
What are the main key post-deal integration risks?
Integration is where the biggest risk lies for companies and also where the opportunities materialise. Communication is key at such a time, as is ensuring a clear integration plan and a shared vision, which is consistently communicated to all stakeholder.
If it is not clear what you are working towards then there is real risk you lose value. Losing value can include losing key revenue generators and clients moving to alternatives.
In order to maximise the chance of retaining and creating value, you need a clear integration plan. You need to stay true to your intent and get good advice and support around you at all times, before and after the deal.
James Ferris is PwC Bermuda, Advisory leader. He can be contacted at: firstname.lastname@example.org
James Ferris, PwC, M&A, Bermuda Monetary Authority