After a record year 2015, M&A activity in (re)insurance was relatively modest for most of 2016. However, since 4Q 2016 we have seen several large transactions across the globe, such as Sompo buying Endurance, Fairfax acquiring Allied World and NN Group making an offer for Delta Lloyd. In addition, there have lately been several rumours about potential mega-deals.
Is this the start of another M&A wave, fuelled by the absence of organic growth opportunities in mature markets and by regulatory change such as Solvency II?
One of my observations is that insurance acquisitions tend to be executed and implemented in a rather standard way. Funding is done - in descending preference – with available cash, new debt and/or new equity. In the integration phase, the main focus normally is on realising the cost synergies needed to make the deal earnings accretive for shareholders. Let's keep in mind that historic M&A deals have often not delivered the expected revenue enhancement and synergies.
I think it is sometimes overlooked that using reinsurance in a smart and strategic way can enhance and secure the value creation for a buyer. As a reinsurance professional I feel very strong about this and would like to ensure that buyers and M&A advisors regard reinsurance as integral part of the tool kit when considering and structuring deals.
For example, reinsurance can greatly help to optimise the post-acquisition risk/return profile. Not only by adapting the existing reinsurance programmes to the new situation but also by targeting specific parts of the acquired business that are non-core for the buyer or result in undesired risk accumulation. Reinsurance can carve-out such risks with tailor-made solutions, ranging from excess of loss protection to a full portfolio transfer. This releases required regulatory and rating agency capital, which can help to reduce the amount of new debt or shares to be issued to finance the acquisition.
Reinsurance can also help a seller to improve the execution certainty of and the proceeds from a divestment. For example, reinsurance can be put in place to protect the capital base and credit rating of the entity up for sale. Such protection can be established on a temporary basis until the transaction has been completed or over a longer period of time to provide ongoing cover and comfort to the buyer.
There are many other ways I can think of how reinsurance can create value before, during and after a transaction. I am very interested in your views on insurance M&A in general and the role of reinsurance in particular. Please do not hesitate to post a comment or reach out to me directly.
For more information on insurance M&A and reinsurance for strategic purposes, please have a look at sigma 3/2016: "Insurance M&A – Start of a New Wave?" and sigma 05/2016: "Strategic reinsurance and insurance – the increasing trend of customised solutions"