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M&A beware: half of carrier deals destroy long-term value; midsize $1-5bn range sweet spot

17.05.24 AdvantageGo

The re/insurance sector has been an M&A hotbed, but a new study suggests serial acquirers and the biggest deals are much more likely to destroy than create long-term value.

A decade of mergers and acquisitions (M&A) have transformed the landscape of insurance and reinsurance carriers, boosted by years of soft market pricing leading CEOs in many cases to seek deals among their peers in lieu of major organic growth.

The current hard-pricing stage of the market cycle may argue more in favour of finding organic growth than M&A deal-making, but the softening phase of pricing is inevitably around the corner.

This will, cycles suggest, more than likely result in an uptick in re/insurance M&A activity, timing which potentially makes a piece of data-led M&A research highly useful for CEO and board-level consideration.

In this context, a new study from ACORD, the data standards body, and sponsored by underwriting technology partner AdvantageGo, provides sobering reading for those carriers that may consider, or have already embarked on, major acquisitions.

The headline finding from this landmark piece of research is that only 52% of the last decade’s largest transactions by insurance carriers have created long-term value for their shareholders.

ACORD’s study screened 15,000 global carrier transactions by insurers across P&C, life, and reinsurance, assessing M&A strategy and deal outcomes. Criteria for inclusion were: transaction value was disclosed; deal was valued at $1bn or greater; and buyer was a publicly traded insurer. This resulted in a field of 80 large public M&A transactions worth a cumulative sum of $290bn.

The paper asked three core questions: what motivates carriers to engage in M&A; does engaging in M&A lead to value creation; and what are the value barriers & imperatives? The answers ranged from insightful and intriguing to deeply worrying for management and investors in the companies involved.

As a group, only property & casualty insurers were likely to create long-term value, but 30% of these primary market P&C deals were still destructive of overall value. Worse, reinsurers were split evenly – 50:50 – between value creation and destruction.

Life and composite insurers, on the other hand, were disproportionately likely to experience post-transaction dilution of value, with 64% and 60% of transactions concluded to be destructive of value.

Goldilocks sweet spot?

Speaking on the Voice of Insurance podcast alongside AdvantageGo’s Ian Summers, Acord’s CEO, Bill Pieroni, acknowledged that there was something of a “sweet spot” in terms of the size of a transaction and its likelihood to generate or destroy value.

“What’s interesting is that transactions over $5bn destroy value, regardless of shareholder value at risk. Transactions under $1bn or about $1bn, they destroy value – there’s a sweet spot,” Pieroni said.

He noted that for carriers that have engaged in multiple successive mergers, the likelihood was again that they would destroy shareholder value in the majority of cases, with various hypotheses for why this might occur on a case-by-case basis.

Host Mark Geoghegan pressed the point about a “Goldilocks size” between $1bn and $5bn.

Pieroni hypothesized that for transactions under $1bn, carriers tended to pay less attention to detail, in terms of specific value or execution. However, for deals more than $5bn, these are seen as “an existential risk”, leading to a lot “more focus”, but potentially also a willingness to overpay.

“It’s a big bet, so let’s pay for it,” he continued. “Maybe it’s so complex, the antithesis of a little deal, by digesting this – it’s a Python swallowing a goat – it takes months, and it’s much harder.

Timing, cash-flows, and the efforts required to perform these feats become crucial factors in determining the success of such transactions, he suggested.

“It may make sense on paper, but you’re making, $5bn in real terms, that’s a big deal. How are you going to digest that? That’s the Goldilocks principle there,” Pieroni said.

For the sweet spot, acquirers making one or two transactions in the $1-5bn range are judged by Pieroni to be more likely to be opportunistic, rather than M&A as grand strategy. On the other hand, those insurers making several deals in succession within the same range are “serial acquirers”.

This, he acknowledged, might be expected to be a positive for a strategically-minded acquirer, resulting in learned M&A experience and merger expertise, arguing on the side of generating value.

“But the data doesn’t show that,” Pieroni said. “Maybe two [deals] shows you’re being thoughtful and opportunistic, that you’re being disciplined. These are statistically significant numbers, we’re talking about hundreds of basis points better,” he said.

He cautioned the difference between correlation and causality – there may be other causal factors at play rather than just looking at M&A for the firms involved, as the study has done.

“People who floss every day have much lower rates of heart disease, that doesn’t mean go home and floss to cure heart disease. What that means is there’s a set of behaviours around people that floss that probably have to do with diet and exercise,” he noted.

“Those buying three or more, I don’t think it necessarily destroys value, but if you’re spending money, it indicates that maybe you’re being a little cavalier about it,” he said.

While causality, in terms of behaviours, is difficult to ascertain, the correlations are too significant to ignore, he emphasised, relying on ten years of data and thousands of transactions.

Buyer motivations

The ACORD study did look into buyer motivations, which are closely linked to such behaviour. The data standards body’s analysis found four key sources of buyer motivations in M&A deals.

  • Scale and Scope: Amortize fixed costs and improve resource access by increasing absolute size, and/or expanding scope across strategic and tactical dimensions.
  • Core Expansion: Increase share across areas in which the insurer already executes, such as products, geographies, channels, and customer segments.
  • Capability Acquisition: Optimize the risk, cost, and time associated with developing new or enhanced internal capabilities.
  • Diversification: Expand portfolio by acquiring new revenue and earning sources.

Reinsurers were found, on aggregate, to prioritise “scale and scope”, as did life insurers. Life insurers found most of their merger benefits in this category, but not enough to avoid still being destructive of value in the majority of cases. Indeed, only P&C insurers gained significant long-term returns in M&A transactions motivated by scale and scope.

Core expansion was the second biggest driver among dealmakers, ACORD found, and transactions motivated by this goal were concluded to be the only consistent source of value creation among composite carriers and reinsurers.

Capability acquisition was most popular as an M&A driver among P&C insurers. Such P&C deals with this rationale resulted in modest positive returns, but it was still the lowest-performing category for this line of business. Perhaps confirming the traditional reinsurance industry’s conservative stereotype, no reinsurers in the study exhibited capability acquisition as their primary motivation for M&A.

Lastly, diversification was the least common rationale for carrier M&A activity overall, and produced wildly divergent results across different lines of business, emphasising the lack of a “one-size-fits-all M&A philosophy.

P&C insurers, which almost exclusively limited their diversification to other P&C lines, were the only group to see positive outcomes with this motivation, and it accounted for their highest returns. Life and composite firms, on the other hand, often straying beyond their core, saw their worst outcomes by far in diversification-driven deals.

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