Transformational opportunities

13-01-2016

Transformational opportunities

As the value of re/insurance megadeals surpasses $80 billion in a record year of mergers and acquisitions, Arthur Wightman, insurance leader and Scott Watson-Brown, asset management leader at PwC Bermuda, discuss the challenges and opportunities of these transactions with Bermuda:Re+ILS.

While the economic rationale for mergers and acquisitions (M&A) within the insurance and reinsurance sector has been well established for some time, few could have predicted the acceleration in activity and the scale of many of the deals seen in 2015, in particular in the P&C space.

The combination of readily available capital, new and renewed investor appetite and pressure to build scale and reach into new markets means that multi-billion dollar ‘megadeals’ are likely to form a significant proportion of the surge in transaction values.

The changing competitive landscape also means that deal partners may be different from the standard targets of the past. For an insurer, this could be a reinsurer, insurance-linked securities (ILS) fund or even a technology or telecoms company.

With increased scale comes heightened risk, but also opportunity.

Alignment with overall company strategy and preservation of value are key to pending and future mergers, as Arthur Wightman, insurance leader and Scott Watson-Brown, asset management leader at PwC Bermuda, explain.

“The size of recent transactions naturally creates potentially greater complexities and possible pitfalls,” says Wightman, co-author of PwC’s report ‘Insurance 2020—On track for the payback: Realising megadeal potential’, published in September.

“There’s a potential danger that the strategic credibility of the merger is defined by its size rather than the genuine suitability of the fit.

“Acknowledging these challenges and tackling them head-on drives the best chance of success, in particular where bold decisions are being taken in response to today’s M&A market." Arthur Wightman

“Decisions need to be fully informed, with those responsible being assigned and accepting accountability, from board level through to business unit leaders driving the operations, for the evaluation and delivery of deal objectives. These megadeals can propel businesses ahead of competitors and have the potential to reshape the industry,” he says.

The value of insurance-targeted M&A up to the end of July 2015 was more than $80 billion, a record high for the first seven months of a year.
Watson-Brown says: “We are seeing the significant growth of ILS and other alternative capital sources add to the pressure of the traditional reinsurance model, which may create an uptick in M&A and other joint venture activity.

“Acknowledging these challenges and tackling them head-on drives the best chance of success, in particular where bold decisions are being taken in response to today’s M&A market.

 

“I don’t believe anyone is clinging to the hope of a major loss event or series of events to create a change in the market. Companies are looking to capitalise on the expanding interest in the market, and evolve their business model accordingly.”

Challenges ahead

The PwC report highlights the challenges facing the insurance industry in the midst of the flurry of megadeal M&A activity, including:

  • The risk that deal strategy could become defined by size rather than suitability and fit;
  • The possibility that a technology or telecommunications giant could seek to acquire an underwriting platform and ready-made market share to align with its own analytics and distribution capabilities;
  • Sufficiency of deal strategies to face the heightened size and complexities of such megadeals;
  • Board challenges around competing in an increasingly consolidating marketplace; and
  • The risk that non-participation in the current M&A wave could make companies vulnerable to takeover themselves.

The report underlines the importance of board level ownership for the evaluation and delivery of deal objectives.

“With the industry transforming, finding ways to sustain growth and keep pace is vital,” says Watson-Brown. “By focusing on the basics with a clear vision of how and where their organisations intend to compete, boards can fully realise the role M&A can play in reinforcing their competitive platform.”

Equally important is perfecting corporate communications. One of PwC’s single biggest recommendations is to consider how to ensure investors, employees and customers understand the deal objectives, the integration activities necessary to achieve those goals, the metrics used to measure whether those goals are being met, and who is responsible for delivering them. When big companies are coming together, it’s especially important to explain the path to how synergies will be realised.

By their very nature, megadeals require more justification, more detailed evaluation and more effort to make them work.

“The most successful M&A are marked out by a clear and up-front sense of what kind of businesses would offer the right fit over the long term,” says Watson-Brown. “This is underpinned by rigorous diligence, effective communications and clear planning and ownership of integration.” 


 

The report, ‘Insurance 2020—On track for the payback: Realising megadeal potential’, can be accessed via the website here

Arthur Wightman is insurance leader at PwC Bermuda. He can be contacted at: arthur.wightman@bm.pwc.com

Scott Watson-Brown is asset management leader at PwC Bermuda. He can be contacted at: scott.watson-brown@bm.pwc.com

Arthur Wightman, Scott Watson-Brown, PwC Bermuda, Bermuda

Bermuda Re