It all comes down to motivation
What is currently affecting M&A activity in the Bermuda market?
In the past, M&A activity in Bermuda was driven by a desire to scale operations, spreading fixed expenses across a larger premium base. However, when you look at the transactions that have taken place since 2015, the theme has been diversification.
Most deals were matches with very little overlap in core businesses and added either new geographies or new lines of business to the acquirer. In general, we should expect this to continue to hold true and the recent acquisition of Validus by AIG is a continuation of the diversification trend.
With AIG’s acquisition of Validus, the game has changed. Validus was viewed as one of the premier Bermuda players and was widely considered to be an active market buyer. This is the second recent deal where a global powerhouse has acquired a premium property to make itself stronger (Sompo’s acquisition of Endurance is the other). This signals that any and all Bermuda properties should be considered as potential targets as companies strive for scale and diversification.
Another theme that has not yet impacted M&A but that is likely to be a key factor in 2018 and beyond is the change in US tax law. The change in the tax law erodes Bermuda’s tax advantage and will likely fundamentally change why companies seek reinsurance from Bermuda.
Beyond being a favourable tax environment, Bermuda also presents capital efficiencies and is a significant hub of underwriting talent and expertise. Moving forward, it will be underwriting talent and expertise that will make Bermuda companies continue to be attractive targets for acquisition.
Is there any appetite for M&A at the moment and will that change?
The M&A appetite for Bermuda companies will remain strong but there will be fewer properties to choose. I would expect to see more acquisitions of the remaining top tier Bermuda properties while the remaining smaller companies in play may resort to defensive mergers with other Bermuda entities to try and keep pace and create the scale to become a more difficult acquisition to digest.
M&A has been a frequent component of insurers’ strategy of late as growth has been very difficult to achieve organically. Acquiring a book of business or selectively acquiring talent from competitors is a much more effective strategy for profitable growth. It is unlikely this will change in the foreseeable future and that will continue to drive M&A appetite.
Companies that have recently made acquisitions see M&A as part of their overall strategy and will continue to make acquisitions as long as capital is abundant, debt is cheap, and deal prices are reasonable. Following AIG’s acquisition of Validus, Bermuda companies’ stocks were all trading up. This signals that the market expects to see continued acquisition activity in Bermuda.
What could the M&A deal flow in 2018 be like?
M&A deal flow in 2018 is likely to look similar to that observed in 2016 and 2017. There continue to be opportunities and with overcapitalisation prevailing for the foreseeable future, M&A will continue to be a storyline. Acquisition prices, in general, appear to have stabilised, although the price to buy a top tier company continues to be at a significant premium as evidenced by the multiples that Validus and Endurance received.
M&A could potentially pick up as serial acquirers complete past integrations and turn towards the next acquisition. ACE, for example, was a frequent acquirer that has been fairly silent in the marketplace since it acquired Chubb and rebranded as Chubb.
John Charman (formerly of Axis and Endurance) now has the backing of Sompo’s global balance sheet and a mandate to build Sompo International and the option to use M&A as part of Sompo’s global strategy.
Meanwhile, AIG’s Brian Duperreault has cited that Validus is the first acquisition of AIG’s active changing growth strategy.
The one thing not to lose sight of is the adequacy of loss reserves. If we continue to see more companies taking reserve charges, I would expect to see M&A tighten as companies focus internally on their balance sheets.
What tips can you give for enabling M&A deals to be completed smoothly?
Smooth deals are smooth because they are targeted, well thought out, and executed effectively. The first step is to ensure you have the right internal team with a sound strategy and the right team of external M&A professionals to advise you. Significant time should be spent during the strategy phase to understand the motivation of the potential acquisition and the short and long-term benefits.
An acquirer must understand and anticipate the issues that are likely to arise during due diligence and ensure flexibility during the due diligence process to successfully tackle the issues raised without losing sight of the original plan.
As a financial industry, we often focus on getting the right price for a transaction, perhaps to the detriment of the other important factors in an M&A. While getting the price right is important, it’s only table stakes. What separates successful deals from unsuccessful ones is the planning and execution on the integration and go-forward strategy of the new company.
Joseph Milicia is a P&C M&A Practice Leader for the Americas, Willis Towers Watson.