Mergers and Acquisitions in (Re)Insurance:
There has been a lot of activity lately as it relates to Mergers and Acquisitions in (Re)Insurance. Margin compression and the tax package have firms and their investors wondering – how are we going to thrive in this new environment with abundant Capital and disruptive technology pressures.
Many boards are wondering – do we have the best mouse trap?
Do we underwrite risk better?
Do we attract customers and have a great value proposition?
Do we organize around the customer best?
Do we have a competitive cost of capital?
For some the answers are YES. These firms are normally top in class in the businesses that they compete.
For many others, the answer is NO. These firms were established in hard markets, tight capacity, grew during times when management wasn’t pressured to be top management, growth was easy and there was plenty of room in the sandbox for competitors to play nice and everyone get their fair-share of opportunities. They didn’t have to be strategic management teams and could access risk and squeeze out double digit margins for their investors in years of good Property CAT results. Think about the saying “better to be lucky than good”.
Reinsurers and Insurers were living examples of organizations that embodied this philosophy.
Now in this different world of abundant capacity, slower growth, and new competition from disruptive technology startups – it is only better to be good (luck will be less of a factor). Management has to be top notch, management will be graded much tougher from investors especially when it relates to results in the following areas:
- managing expenses,
- organizing and accessing risk,
- aligning with the customers,
- constantly transforming the balance sheet to be most efficient capital,
- reorganization efforts,
- selling off legacy liabilities which provide drag on income statement,
- investment strategy.
The firms who don’t do the above well, aren’t lucky, and don’t have enough market presence to succeed in all markets will have Income Statement and Balance Sheet identifiers. Their stocks will trade accordingly.
These firms are likely to be the ones we will see in M&A scenarios.
This M&A trend is only going to continue, grow and repeat.
Eventually (years after this cycle) there will be too few competitors and the opposite effect will occur (think class of 1986, 2001, etc). But plenty of time until that occurs.
We have too many underwriting shops and too much capacity to support the current infrastructure.
Expect more M&A and change as a result.