sigma 03/2015: M&A in insurance: start of a new wave?

Mergers and acquisitions (M & A) tend to come in waves. After declining sharply in the wake of the financial crisis, overall M & A activity in the insurance sector has been relatively low in recent years and has only just started to increase. Surveys also suggest sentiment towards M & A is turning as insurers look for ways to deploy excess capital, boost or diversify revenue growth, build scale and ultimately bolster profitability in the face of ongoing economic headwinds.

After declining sharply in 2009, overall M&A activity in the insurance sector remained relatively subdued in the ensuing years. But activity has picked up in recent months, and the pipeline of future deals has increased. Further, survey evidence indicates that sentiment towards M&A is turning.

In "M&A insurance: start of a new wave?" sigma researchers examine the the upswing in M&As, finding that they have been segment-specific rather than industry-wide. Some key themes in recent insurance deals include divestments of closed blocks and run-off operations. Such disposals can be an effective way to achieve early exit from business in run-off so that capital may be redeployed to new or expanded lines of business. Other themes include a number of M&As involving insurers from emerging markets, particularly Asia Pacific and Latin America, and significant consolidation in the insurance intermediaries segment.

There has also been consolidation in the specialty re/insurance sector. This has come about as the influx of alternative risk-absorbing capacity from hedge funds, investment banks and pension funds has intensified competitive pressures on small to mid-tier (especially mono-line, property catastrophe-focused) reinsurers. Incumbent re/insurers have sought potential takeover targets or strategic mergers to boost their capacity and market reach as well as achiveve cost savings.

Adding value?

From shareholders' perspective, an M&A is successful if it creates economic value and boosts wealth.  The track record of M&A success in insurance, as in other industries, is mixed. Empirical analysis of share price developments of insurers involved in an M&A over the past decade suggests positive returns for buyers in the long run but there is a wide variation across transactions.

The extra value created by a merger or acquisition reflects the synergies that can be harvested by a combined entity. But M&A also involves operational and business risks. The task of managing and mitigating these risks ultimately rests with the managers of insurance companies. Reinsurance solutions can potentially help strengthen or relieve pressure on insurers balance sheets either as a preparatory step before a sale or in the aftermath of an acquisition.  In reality, however, reinsurance is underutilised as an M&A capital management tool.

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sigma 03/2015: M&A in insurance: start of a new wave?