Insurers who have undertaken significant mergers and acquisitions (M&A) are underperforming according to a new report – for only the second time this decade.
Analysing data from Thomson Reuters on deals worth at least US$50 million conducted in the insurance sector, the Willis Towers Watson Insurance M&A Performance Tracker found that acquirers lagged the index by 6.4 percentage points in the period six months before announcement to the point six months after the deal closed.
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It was a different story in previous years – particularly from 2008 onwards – in which insurance companies carrying out an acquisition outperformed peers by three percentage points. More recently, from 2012, acquisitive insurers have traded 4.4 percentage points above their sub-industry index.
Factors contributing to the weaker performance of late include political volatility, a strong equity market, as well as a high-value and low-volume M&A environment. Willis Towers Watson noted that there were only 19 insurance deals tracked in 2016, with the average deal value almost double compared to that in 2015. Pretty much the same could be said for 2010 – the previous underperforming year.
“The market tends to be nervous around big, transformational transactions and more comfortable when most activity involves smaller incremental bolt-ons,” explained Brendan McMaster, senior consultant at Willis Towers Watson. “All other things being equal, big transactions are generally deemed to be riskier for the acquiring company.”
Fergal O’Shea, EMEA (Europe, the Middle East, and Africa) life insurance M&A leader at Willis Towers Watson, commented that with equity markets doing well, firms do not need to acquire as shareholders are rewarding those focussing on organic growth.
“Geopolitical uncertainty and the surprise poll results in the UK’s Brexit referendum and US Presidential elections could also have been factors in shareholders’ cautious reactions to big ticket transactions,” added Willis Towers Watson.
As for M&A activity across all sectors, it was found that a similar trend exists outside the cover industry – acquirers underperforming firms that did not do deals. For Willis Towers Watson, this could indicate a “risk-off” mode for investors, especially amid higher-than-normal deal values.
“M&A is still beneficial, and it will be interesting to see what the data for 2017 shows,” said O’Shea.
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