At Awbury, our business model is built on the concept of adding value in providing solutions to the credit, economic and financial issues which our clients bring to us- a very different approach from the flow-based, commoditized, cost-plus one which still tends to prevail in much of the (re)insurance industry (let alone elsewhere.)
Scale may be a wonderful thing, but only as long as it creates sustainable value. This is why it seems odd to us that large-scale M&A activity designed to create scale rarely seems to manage to improve Combined Ratios; with the attrition of cost bases and reserve releases only serving to beat back the impact of softening pricing and the disruption coming from “InsureTech”, as the industry struggles with excess capital (even after Q3/17) and the unwillingness of many participants to “walk away” from pricing that is below the so-called “technical reserve” level. Although the events of Q3/17 have raised hopes that pricing trends in the affected NatCAT markets will turn upwards, the evidence remains mixed as the renewal season approaches its end.
The corporate world in general is littered with spectacular examples of value-destruction (leaving aside the truism that the majority of mergers or acquisitions fail to deliver on their supposed benefits)- AOL/Time Warner and Rio Tinto/Alcan come to mind. Both were considered “good ideas” in their time, but turned out to be spectacularly bad in terms of creating value. It will be interesting to see how the AT&T/Time Warner and Disney/Fox transactions turn out. And consider that Shell has accepted the fact that its purchase of US “tight oil” assets near the height of the last oil-price peak was a very poor decision, and now seeks to unload them in some way that at least saves face.
So, why do such events occur with monotonous regularity, when patience and discipline in building one’s existing business would be more likely to preserve and create value?
There can be no single answer to this, but it seems reasonable to assume that senior executives and Boards are susceptible to the blandishments of bankers and other “advisers” who have an interest (and need) to generate business in order to earn fees (and keep their jobs.) Of course, this is something of a caricature. However, there seem to be few investment banks which have the ability to resist providing a “valuation letter” that magically demonstrates that the price for “Xco” bid target is fair and reasonable.
In reality, the success of a transaction depends upon many factors, both tangible and intangible. And some demonstrably work (witness Ace and Chubb), while others do not (Travelers and Citibank).
We suspect that one of the issues that leads to frequent failure and value destruction is “groupthink”; as, once an “idea” gains traction, more and more of those involved are sucked into the belief (because that is what it is) that “buying Xco” is a very good idea, and that the naysayers are the ones who are irrational. All complex organizations develop a culture over time, which is a major indicator of their long-term viability and success, because, unless it is fit for purpose, open and adaptable, it is likely to lead to poor decision-making and an unwillingness to change a decision in the light of further information. In such circumstances, those who challenge the orthodoxy are likely to find themselves ignored, or worse.
At Awbury, our approach has been, and will continue be, to grow organically (avoiding delusions of grandeur) and to provide carefully constructed, bespoke, confidential and value-added products and solutions to our range of clients. Our ideas should not merely “appear” to be good ones; the products and structures we create must demonstrably be valuable, with the actual outcomes being the objective evidence.
The Awbury Team