Strategic approach to mergers & acquisitions key for insurance industry

05 April 2017 5 min. read

Changes in the insurance industry, largely the result of digitalisation of key processes inside and outside the landscape, is creating new incentives for engaging with the startup / scaleup scene. While partnerships are the preferred method of connecting, corporate venture capital investment and M&A too feature are means of acquiring relevant expertise. Aligning acquisitions and divestment with broader corporate strategy is key.

The insurance industry is facing challenges from a range of sources, many of which may come to affect product lines and, in some instances, even whole business models. Customer expectations too are changing, requiring investment in technologies that better meet those expectations, while automation and new forensics technologies transform the back-end at insurers. Technology is not merely acting disruptively in the sector itself, but new ways of operating automobiles, which allows for driving to be partly, or eventually fully, automated, considerably reduces, or even transfers, risks, thus reducing the need for insurance as such.

Trends within the industry demand new ways of working, new technologies and new models. Insurance companies, and their shareholders, are increasingly focused on leveraging M&A activity, not merely to drive growth through access to new markets, but also to access new technologies and models being developed by startups and scaleups. KPMG's research, titled 'The New Deal: Driving insurance transformation with strategy-aligned M&A', involved 200 executives across the globe operative in the insurance industry.

Deal making shifts into high gear and corporate venture

The firm’s anaysis finds that surveyed companies are continuing to leverage a range of channels to transform their operating models. The top most cited mechanism used by companies surveyed to transform their operating model is partnerships, cited by 87% of respondents, this is followed by 64% of respondents that said that they use M&A. In terms of infrastructure, 76% of respondents say that they will leverage partnerships to access technology, compared to 29%of respondents that plan to use M&A.

Deal making among respondents remains high however, with 84% indicating that they plan to conduct between 1-3 acquisitions in 2017, while 94% say that they will make at least one divestment. In addition to partnerships and M&A, respondents also indicated that they are increasingly relying on corporate venture capital investment.

Aligning strategy with M&A activity

According to KPMG the past trends in M&A, such as acting reactively to changing market conditions or as part of wider business aims focused on growth, are no longer sufficient. M&A searches, the firm cliams, need to be aligned with business strategy, whereby targets are selected in so far as they drive innovation and transformation.

According to the firm’s survey, around 39% of respondents say that aligning their deal evaluation policies with wider corporate strategy are a key factor for M&A success. 37% of respondents, however, also note that their priority is to be reactive to market opportunities – highlighting considerable gaps between strategy and implementation.

Further gaps were also identified by the researchers. 47% of respondents say their dedicated M&A teams believe their deal indentification objectives are aligned to corporate strategy, while 50% say that they are less aligned when it comes to evaluating potential risks associated with integration/separating the target’s operating models.

Two key motivators to drive acquisitions

Regarding the two, ranked, key motivations for M&A activity at the companies surveyed, transforming the business model come out on top, cited by 33% of respondents, followed by second place for 12% of respondents. Enhancing the existing business model was also cited by 33% of respondents as a key reason for acquisitions in 2017, while 4% gave it second place. Operating model transformation came third, cited by 16% of respondents as the primary reason and 33% of respondents as their secondary choice.

Areas of less concern included acquiring innovation capabilities, cited by 9% as a primary concern, 5% that said staying abreast of disruptive industry trends was their primary motivation, while 4% said that their primary reason was enhancing the existing operating model.

Divestment two key motivators

While companies said that they are likely to engage in multiple acquisitions in 2017, the report also notes considerable interest in divestments – at 94% of respondents. The key reasons to exit parts of, or the whole, businesses are varied.

In terms of the top most reported reason for exiting a business, poor performance was by far the most cited reason, as noted by 38% of respondents as their primary reason, followed by 31% that said it was their second most important reason. Strategy does feature as a key reason for divestment, with 19% of respondents saying it was a primary reason to exit, while 4% said it was a secondary reason to do so. Paying down debt and opportunistic sale came third equal in terms of primary reason at 12%, while needing funds for new acquisitions and re-positioning the company strategically came forth and fifth, at 11% and 9% respectively.

Important factors for deal execution success

In terms of other factors indicated by respondents as the most important for deal execution success, aside from the ‘deal evaluation process aligned to corporate strategy objects’ (39%), a ‘well-executed integration/separation planning’ was highly cited at 24% of respondents, followed by ‘effective due diligence, including real-time data and analytics’ at 22% of respondents, ‘deal structuring/negotiation’ came in fourth at 9%, while ‘valuation/deal price was the least prized on 8%.

“If you are using M&A to effectively transform your business, you can’t just jump at opportunistic deals, you need to be much more strategic,” notes Ram Menon, Global Lead Partner of Insurance Deal Advisory at KPMG in the US. “Insurance organizations need to make investments that deliver on the longer-term strategy for the organization. And that is where the big challenges will lie.”