The current open season on (re)insurance M&A, brought to mind the children’s song, with its image of objects falling one by one. Alternatively, one might start to wonder about who, amidst all the activity and the apparent significant narrowing of the pool of available “targets” will remain the last person standing.
We are sure, as the industry heads to Monte Carlo for several days of frenzied meetings and hospitality, that speculation will be rife as to whether further transactions may be agreed at 3am, in venues carefully screened from the Tables.
Already this year AIG has acquired Validus; Axa should shortly complete its acquisition of XL; while Aspen is likely to disappear into the portfolio of the Apollo Group. The market capitalizations or likely acquisition price of those peer entities which remain independent certainly opens them to being in the sights of a range of potential acquirers, with none invulnerable in simple economic terms to a bid.
As S&P pointed out in its recent “Bulking Up: The Global Reinsurance Sector Marches Towards Consolidation” report, the entire sector faces tough market conditions and structural changes, which weaken competitive positions (as well as lower returns on equity- largely mediocre at best), driving senior executives to seek cover in M&A activity and an attempt to increase premium flow through a supposedly more efficient cost structure and a broader range of product lines.
The problem is, if everyone is doing it, what is really going to differentiate the “thrivers” from the survivors, let alone the obsolescent zombies hoping to shuffle along without being finally put out of their misery? It is a truism of corporate lore that many mergers do not deliver the promised “synergies and efficiencies”, and are often value destructive because vested interests (and self-preservation) prevent the implementation of truly radical actions which could deliver clear benefits.
Of course, the reinsurance market, while it contains a number of “big beasts”, is hardly dominated by them, as they are not able to extract rents because of the availability of alternative capital. The market still remains quite fragmented even after years of consolidation. This then begs the question of whether reinsurance M&A is now “offensive” or “defensive”. In most cases, it appears defensive, as the acquirers are trying more to protect themselves against increasing market pressures, rather than gain capabilities that will truly enable them to break away from the pack.
In reality, no-one is going to be surprised by the next M&A announcement as long as the current patterns and behaviour persist. There is little or no originality being exhibited, with most of the excitement now arising in the form of Insurtech investments, and attempts to change business models internally. If that is the case, one could argue that a potential acquirer’s management should ask itself some hard questions about the true purpose of an intended acquisition and how it will truly improve the acquirer’s competitive position.
It seems to us that, while there may be a need for some “one stop shops”, there also remains a clear need for innovative business models that break away from the realm of the “expected” and deliver products and services to their clients that the “big beasts”, weighed down by their often bureaucratic structures and processes, find it hard to provide.
The Awbury Team