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As consolidation continues to reshape the landscape for re/insurers, Alan Bossin of Appleby Bermuda gives Bermuda:Re+ILS his take on what is driving this activity, where pricing is, what the risks are and how a jewel can be found in even the most ostensibly weak target.
What are the main drivers of M&A?
The main motivation behind mergers and acquisitions (M&A) insurance transactions is to become stronger. This can be accomplished through a meeting of equals where strength comes from a combination of two operating entities or through a merger scenario where a stronger merger partner is looking to acquire key assets from its counterparty to round out a portfolio or expand reach.
Bigger becomes better in merger scenarios as larger players look to continually strengthen their influence. Stronger can also be achieved through acquisitions where equity is injected and restructuring is undertaken in order to create a stronger and more dynamic operating platform.
Are they different for different types of buyers?
Fundamentally, there is one type of driver that moves transactions, with buyers falling into the spectrum of that overarching ‘becoming stronger’ driver. There are buyers in the form of successful but perhaps smaller entities looking for an equal partner as a method of growth in order to become ultimately stronger.
There are buyers with strong balance sheets and operating units looking to build and become bigger. There are private equity buyers looking to turn a target into a stronger player. In all instances we see concern surrounding how to deal with preferred equity which is often viewed much like debt and how one is able to ‘lock up’ a deal while respecting the fiduciary duties owed by a board to the company.
What does the pricing look like?
Pricing is determined by the type of merger being undertaken and the strength of the entity being acquired. The stronger the target the more premium a buyer is willing to pay to acquire those assets. Or, to put it another way, the stronger the target the more it is capable of holding out for a higher premium.
An already strong performer with a healthy balance sheet has more options in the marketplace and can wait for a significant premium to be offered to shareholders. Targets with more troubling issues have less leverage and can be seen recommending very nominal share price increases to shareholders for their consideration.
What are the risks of integration for some buyers?
Risks of integration do not appear to be as significant as they once were. Companies are more disciplined in how they deal with operating units and are more sophisticated when it comes to the complexities of integration.
In some cases an acquired entity may be left as a standalone separate operating entity while in other instances location, staffing, operating functions are completely integrated over a certain time period.
How will all this change the landscape?
While some might conclude that a changing landscape is the normal result of increased M&A activity in the insurance space, this may not necessarily be the case. In any kind of merger the focus is operational. Business continues to be written and clients serviced. Whether ownership of that business has changed causes, at best, only a nominal impact in the marketplace.
Perhaps as the strong get stronger they have increasing clout in the marketplace and can more effectively drive prices to their benefit. However, new disrupters in the market can, in many instances, temper any advantage created by strength and size.
As the marketplace continues to develop, as new players enter the arena and as technology and innovation continue to advance, the landscape certainly does begin to alter, but merger activity may not be the biggest driver in a changing landscape.
Are we seeing a further tiering of the market?
One could say that the big are getting bigger, but the market appears vibrant and robust and does not seem to have fallen into a fully tiered system where the smaller are necessarily disadvantaged. The market continues to provide opportunities for players of all sizes as they seek to find a balance that works for them. So, by sheer size the market has certain defined tiers, but by opportunity the market remains, to an extent, a level playing field.
Any tips for what else we will see in terms of activity?
M&A activity seems to beget further M&A activity. As long as there are reasons to become stronger, in whatever fashion that takes, M&A business will remain very active. Weaker companies will be acquired by private equity looking to change fortunes, while larger companies will always find a jewel or two worth acquiring in the portfolio of an ostensibly weaker target.
Alan Bossin is a partner in the corporate department, Appleby Bermuda. He can be contacted at: firstname.lastname@example.org
Pricing, reinsurance, Bermuda