Prudence and profligacy: two M&A studies urge caution and reveal value destruction of carrier deals

Nearly half of mergers and acquisitions (M&A) among insurance carriers in the past ten years were net destroyers of shareholder value, according to research undertaken by data standards body ACORD and sponsored by underwriting technology firm AdvantageGo.

Only primary market property & casualty insurers were likely to create long-term value, but 30% of these primary market property and casualty (P&C) deals were still destructive of overall value, said the new study from ACORD.

The research focused on 80 deals valued at $1bn or more in the past decade, worth a cumulative sum of $290bn, raking these down into P&C primary, reinsurance, life and composite deals..

Reinsurers did worse than primary P&C: reinsurance transactions were split evenly – 50:50 – between value creation and destruction.

Composite insurers and life firms fared worse still, with 64% and 60% of transactions concluded to be destructive of value.

The report comes amid news from WTW that companies in general are set to show more caution in M&A activity in the year ahead. The broker’s report highlighted several factors contributing to the decline in M&A activity across sectors globally.

Rising interest rates, geopolitical tensions and ongoing supply chain disruptions have created a challenging environment for deal-making, the broker said.

A gap between buyer and seller expectations, particularly in terms of valuation, is further hindering deal completion, WTW said.

Current reinsurance market hard-pricing may argue more in favour of finding organic growth than M&A deal-making, but the softening pricing phase of the market “is inevitably around the corner” and “likely result in an uptick in re/insurance M&A activity”, AdvantageGo pointed out in its own blog on the ACORD report.

Sweet spot of $1-5bn deals

 Speaking on the Voice of Insurance podcast, Acord CEO Bill Pieroni described a “sweet spot” in transactions less likely to destroy value, which is in the $1-5bn range.

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

Pieroni theorised that for transactions under $1bn, carriers pay less attention to details of value and execution, while deals above $5bn represent “an existential risk” to carriers.

“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…How are you going to digest that? That’s the Goldilocks principle there,” Pieroni said.

For carriers engaged in multiple mergers, the likelihood is again that they would destroy shareholder value in most cases, Pieroni emphasised, despite the suggestion of learned experience from successive deals.

“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.

Then why do it?

Reinsurers were found by ACORD to prioritise “scale and scope” as their biggest motivation for M&A, as did life insurers. However, among the types of carriers, 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. 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.

Macro outlook

Looking ahead and across sectors, WTW noted that despite inflation being checked, the deployment of hawkish monetary policy and its effects on debt markets have remained a stifle on deal activity.

The impact of macro-economic factors and geopolitical unpredictability continue to have a chilling effect on overall activity, the broker suggested, making a cautious increase in deal making activity the likely prospect through 2024.

Jeremy Wall, global head of financial, professional and executive risks, WTW, said: “The report suggests that in 2024 a tentative approach will continue as buyers, both private equity and corporate, with considerable cash reserves will keep a keen eye on value and adjust expectations of a sudden return to a bull market or the distress jamboree which some market commentators had been predicting last year.”