Insurance industry M&A sees decline in volume counterbalanced by mega-deals

18 December 2017

M&A activity in the insurance industry has slowed, although large deals aimed at consolidation have sprung up, boosting relative value. While branding-needs drove activity, regulatory matters and geopolitical concerns were cited as key barriers by just under half of executives in the sector.

M&A activity has picked up in recent years, on the back of, among others, low-cost money, a need to strategically access new technologies, and market expansion. The insurance industry has also been active in the space,  as total deals topped €170 billion last year.

New analysis from Willis Towers Watson, in a newly released report ‘Hitting the Right Targets’, explores current trends in the insurance M&A segment, from recent deal history to what is impacting current and future M&A in the segment. The study involved responses from 200 senior-level executives in the insurance industry.

The latest figures put deal value at around €20 billion, a sharp increase on the same period in H1 2016, but down somewhat on H2 2016, when total value stood at close to €40 billion. Deal volume, meanwhile, was down from the same period last year, at 88 vs. 107. This echoes a global trend, which has seen value generally increased and the amount of activity decreased, suggesting that investors are keener on quality than quantity of deals in 2017.The research shows that deal activity has been hit, in part, by global geopolitical uncertainty, with consolidation being a key driving force behind recent deals, although keen attention has been paid to reduce anti-competition business practices. So far, there have been 11 deals valued at more than €500 million this year, compared to 14 such deals in all of 2016.

The research also continues to point to a relatively small group of serial acquirers, according to Fergal O’Shea, EMEA Life Insurance M&A Leader at Willis Towers Watson. He adds “A number of companies have made large acquisitions in the past two years and have been in integration mode. Once that completes, they can turn from being internally focused back to M&A.”Global insurance M&A

In terms of the key aspects of respondents’ wider M&A target focus, a number of responses were garnered, both in terms of broad importance and the most important metrics. On the level of broad importance, return on capital was cited as a metric by 83% of respondents, followed by payback period / IRR, by 68% of respondents. 67%, meanwhile, cited top-line revenue growth.

The single most important metric cited, varied somewhat between the firms surveyed. 22% cited top-line revenue growth, while 21% cited return on capital. Solvency II-based came in at 16% of respondents, while 11% said rating agency criteria.

Attractiveness of potential M&A targetsSynergies have been the most highly cited reason to acquire a company for the past three years. However, the most recent survey suggests that, for the coming three years, ‘gaining a strong brand’ is increasingly important – as indicated by 68% of respondents. Other areas that are also indicated as drivers for acquisitions in the coming three years include access to innovation, technology and / or IP, at 59% of respondents; to better meet regulatory capital requirements, at 65% of respondents; and use of surplus capital, with many firms sitting on considerable dry powder.

Again, technology investment is subject to the same trends as M&A more generally. FinTech investment remained steady over the past year – and while volume dropped off, value persistently increased.

Access to talent is an increasing priority, as labour markets tighten, while diversifying insurance product offerings has decreased in relative importance. Remarking on the trends, O’Shea said, “M&A in the insurance industry will be driven by the need to create synergies, build brands and tackle technological advances. However, as our survey shows, companies will be searching for quality over quantity.”

Major challengesIn terms of expected barriers in deal-making activity expected for the coming years, regulatory matters – particularly for capital requirements – comes in at the number one spot at 45% of all respondents, followed by ‘securing board approval’ at 41% of respondents. Political uncertainties were cited by 35% of respondents, as Brexit and the US Presidency continue to draw international and regional attention.

Low quality targets (20%), shareholder approval (16%), ownership restrictions (16%), insufficient number of buyers capable of executing a deal (9%) and available finance (5%), round off the major reasons cited by respondents.

“For the last few years, companies have been trying to understand the new regulatory regime,” commented O’Shea. “Now there seems to be increasing focus on understanding the best deployment of capital to optimise their returns in light of those requirements.”


8 tips for successfully buying or selling a distressed business

18 April 2019

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.