M&A: readers share their thoughts
Few things set the pulse of an insurance executive racing quite like a juicy mergers and acquisitions (M&A) deal. Bermudian re/insurers have seen their fair share of M&A transactions in recent years, and Bermuda:Re+ILS wanted to find out whether its readers expected more to come.
We also asked why executives are so keen on merging with their competitors. What do they get out of it? What factors do they look for when assessing potential targets, and what factors determine the success, or failure, of a merger?
More than nine out of 10 respondents to the Bermuda:Re+ILS survey expect the number of M&A transactions taking place in Bermuda in 2020 will decline compared with previous years (Figure 1).
The majority of respondents believe the conditions in 2020 are less favourable for M&A than in recent years, principally because most of the attractive target companies have already been snapped up.
“There are simply not many Bermuda companies left,” noted one respondent.
However, reasons were cited for the expected dearth of deals.
The hardening market is making it easier for re/insurers to claw their way back to profitability. “The better pricing environment refocuses companies on organic growth,” explained one respondent.
Another added: “I anticipate less of a push. Excessive pricing increases will lead to profitability returning sharply in late 2020 and early 2021. That will reduce the need to merge—and possibly inflate purchase prices too.”
Companies may also be cautious about buying a competitor and potentially inheriting its adverse developments, a respondent suggested.
The reasons re/insurance companies look for M&A opportunities are clearly varied and complex, as is borne out by the survey responses (Figure 2). The biggest single reason Bermuda:Re+ILS readers identified was the pursuit of improved profit margins and economies of scale, cited by 23 percent of respondents. When two companies can share central functions such as human resources and IT, while significantly increasing their client-base, there is clearly a saving to be made.
Only 8 percent said re/insurers look to make acquisitions as a way to achieve growth in a stagnating market, when other avenues to growth are, or appear to be, closed. But 15 percent emphasised the benefits of diversifying the combined re/insurer’s book of business, which is achieved when M&A targets are carefully selected and the businesses are complementary.
A further 13 percent said the biggest benefit to scaling up the business is that cedants prefer to deal with larger counterparties.
A combination of factors
However, the majority of respondents said the main drivers for M&A activity are all of these reasons. The reasons one CEO has for pushing through a merger are likely to be different from those of another CEO, while few CEOs are going to spend hundreds of millions of dollars on an acquisition without a number of benefits for doing so—unless a single benefit is very significant.
“Smaller, subscale reinsurers have difficulty competing with the global giants, and have a higher expense ratio,” noted one respondent, ticking off two benefits such companies might secure by partnering with a competitor.
“There has to be a strategic fit, so the motivation can come from more than one reason,” said another.
But one respondent preferred to highlight why companies might avoid M&A. “Scale is important for profitability, but sometimes agility and responsiveness are compromised with size,” the respondent said.
Whatever the reasons re/insurance executives have for pushing through M&A deals, it makes very little difference to their clients, according to nearly half of the respondents to the survey (Figure 3).
It is not necessarily that there is no impact on the client, noted one respondent, so much as there are pros—such as the benefit of having a stronger and better capitalised partner offering more different lines of coverage—and cons, such as reduced choice.
Taken together it seems respondents believe these countervailing forces broadly cancel each other out.
However, where respondents did take a position, the balance of opinion was weighted to the negative. “The hardening market, coupled with consolidation, is a losing situation for buyers,” said one reader.
What makes a successful transaction? Is it down to finding the right blend in terms of the right lines of business? Is it about maximising geographical reach, by finding a partner that is strong and well respected in the countries where your own firm is less active? Is it about delivering value for shareholders quickly, to ensure share price stability as the deal beds in?
Apparently not, according to Bermuda:Re+ILS readers. Or, to put it more precisely, not in isolation (Figure 4).
No respondents thought complementary lines of business, or finding complementary geographical presence, alone could make or break a deal. But more than half of the respondents thought these factors, combined with others, together set the scene for a successful merger.
However, while the majority were unwilling to single out a single factor that determined the success of M&A deals, more than a third were willing to cite a single, crucial factor as more important than others: a good cultural fit, respondents said, is vital if a merger is going to work.
“Scale is important for profitability, but sometimes agility and responsiveness are compromised with size”
“Culture cannot be overestimated,” said one respondent, while another added: “Cultural due diligence is often not given the necessary attention.”
Meanwhile, 8 percent said it was down to finding the right mix of senior executives. This makes a lot of sense: even the most well thought-through plan will flounder if its execution is bungled by leaders who are either incompetent or incapable of working together. And a strong team of executives is more likely to have identified a suitable partner than one that pursues an acquisition as a vanity project, or in expectation of benefits that are unlikely to materialise.
“Integration is very complex and multifaceted,” said one respondent, highlighting the multitude of factors that ensure a smooth deal, and the importance of a talented team of executives to pull it off. “Many things need to be done right to succeed.”
One respondent highlighted another factor that determines M&A success: planning. “Execution of a well thought-out integration plan is most important,” the reader said.