For those companies considering a deal, Towers Watson urges them to look beyond solely economic factors and take into consideration aspects such as an insurer's operations, claims and underwriting activities, as well as a host of other cultural issues as part of the M&A due diligence process. These topics were among the many that were discussed by the 75 insurance and reinsurance leaders attending the company's Insurance M&A Growth Strategies and Deal-Making Challenges conference, held earlier this week in New York.
"From a P&C perspective, before we can think of M&A, we have to look at the current environment," said Bruce Fell, director of Towers Watson's property & casualty practice in the Americas. "Insurance pricing remains fairly weak and, given that reserve levels are healthy, companies across the industry aren't feeling the pain to correct to stronger pricing levels. Additionally, the valuations of many companies aren't as strong as they were pre-financial crisis. These factors have contributed to make it challenging for P&C companies to pursue an acquisition."
Fell, who noted that 55% of all insurance M&A activity since 2000 has been in the P&C sector, said M&A opportunities exist for those P&C insurers that have been able to retain their valuation in the market, and that the industry could begin seeing those companies acquire insurers that are not as strong, particularly smaller-sized players.
On the life side, as the capital markets have shown signs of recovery, companies may be seeking to jettison underperforming lines of business, according to Jack Gibson, managing director of Towers Watson's life insurance practice in the Americas. He added that some companies are seeking to add scale and enter previously untapped markets.
"For many companies, organic growth alone won't generate enough top-line growth, in particular since most US life insurance and annuity products have experienced flat or declining sales overall for the industry," said Gibson. "Selective sales of blocks of business may be appealing to some insurers as a way to free up capital and decrease future earnings volatility, while strategic acquisitions may open up opportunities to grow profits and better diversify earnings."
Some companies are expanding globally, Gibson pointed out.
"MetLife's acquisition of Alico, and Prudential's announced plans to acquire AIG's Japanese subsidiaries (Star and Edison), has the potential to transform both companies by enhancing their global footprint and increasing diversification," Gibson said. "These deals could have major implications on the competitive landscape for years to come. On a related note, AIA's recent IPO success may lead US insurers to consider the IPO route as an alternative to a full divestiture."
Gibson added that since the economic crisis in 2008, there has been a marked drop in M&A activity, which has built up a pent-up need for future transactions.
"There are very few companies that feel they are at a current equilibrium point with respect to their market positioning," Gibson said. "Some have indicated they would potentially be open to either acquisitions or divestitures, but that either option would be preferable to the status quo. At least for the next four to five years, I believe M&A activity will increase on the life side."
With the outlook for M&A in the insurance sector brighter than it has been in recent years, it's also important for potential acquirers to understand some of the potential risks and challenges involved in integrating two organizations. According to Mary Cianni, Towers Watson's global leader of mergers and acquisitions, while companies routinely focus on the strategic and financial aspects, they don't always give sufficient attention to some of the operational and cultural elements which can ultimately affect the success of the transaction over time.
Cianni noted that companies typically engage in M&A activity to enter new markets, expand their customer base, or acquire new or additional capabilities, whether in skills, technology or other resources. Achieving these objectives depends to a great extent on retaining key talent in the affected organizations, as well as ensuring a good fit in culture and operating style. Failure to evaluate the quality of the cultural fit early on, in terms of things like leadership style, working processes and the like, can undermine or slow effective integration.
"Our research shows that employees going through an M&A are significantly more likely to begin looking for another job," Cianni said. "Even in the insurance sector, where employees see an M&A more positively than people in other sectors, we still see issues around retention and a belief that career advancement will be stymied. And one thing we know from all of our employee research is that the ability to advance one's career is a top driver of both employee retention and engagement, both for workers in general and for high potentials and leaders as well."
Cianni said she believes companies across all industries are doing a better job of recognizing that nonfinancial factors are a critical part of the acquisition process and need to be taken into account from the earliest stages of target evaluation through full-scale integration.
"Overall, companies today tend to have more experience around how the integration process should be handled, and this is showing in improving success rates, both financially and otherwise," said Cianni.
About Towers Watson
Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at www.towerswatson.com.