M&A in the insurance sector

M&A in the insurance sectorMergers and acquisitions have quickly become among the leading topics of discussion in boardrooms and management meetings. In fact, favorable economic and market conditions are influencing M&A activities in many industries, with four out of five companies in a recent survey projecting at least one acquisition in 2015.

The insurance and reinsurance industry is making a contribution to M&A and consolidation in its own right. Hardly a day goes by that the insurance press doesn’t mention M&A — whether it is reporting on specific transactions or interviewing CEOs, COOs and CFOs about their positions on the subject. The consensus is clear: Insurance sector M&A are being driven by a variety of forces, including several new sources of capital, such as pension funds, investment banks, hedge funds and private equity. Reinsurance companies are sustaining persistent pricing pressure, and middle-tier insurance and reinsurance companies are facing regulatory capital constraints, making them attractive consolidation targets.

Objectives and drivers
The primary motivations cited for insurance acquisitions include excess capital, price competition hindering year-over-year growth, access to new distribution channels, geographic and line of business (LOB) expansion, and synergy. Regulatory capital, tax efficiency and investment strategies also merit consideration. Transactions will take the shape of “bolt-on” and/or transformational acquisitions, and are singular in form or a hybrid of one or more of the following drivers:
  • Diversification — Broadens the acquirer’s offerings, lowers capital requirements, or provides a business profile expansion where a reinsurer buys an insurer with the intent of improving returns by lessening reliance on product commoditization.
  • Distribution model — Acquirer gains a demographic or niche advantage, which may be driven by innovation, including evolving technologies and digital transformation.
  • Scale — Acquirer achieves growth with varying degrees of focus on LOBs, geography or distribution, or as a defensive strategy (acquire a competitor before someone else does).
  • Synergy — Typically, fairly matched companies in terms of LOBs and geography merge to reduce expense redundancy and improve earnings.

In addressing excess capital, there is an added dimension regarding portfolio diversification, a fresh look at deploying capacity (e.g., risk-specific — a book or class of business), and the strengthening of balance sheets. For companies with sound capital positions, getting “bigger” is perceived as one way to manage the threat of third-party capital where, for example, private equity and hedge funds have demonstrated an appetite for investing in products, specialty carriers and specialty insurance-related businesses. Third-party transactions take several forms, such as:

  • Reinsurance vehicles for asset managers (ABR Re) — An asset manager exclusively funds a reinsurer that cedes only its business to the funded reinsurer.
  • Sidecars (DaVinci Re) — Investors take the risk and return on an insurer’s or reinsurer’s book of business in lieu of an equity stake in a reinsurer.
  • Catastrophe funds (Nephila Capital) — Through insurance-linked securities, bonds and derivatives, investors have access to returns uncorrelated to the financial markets of other asset classes.
  • International investors (Fosun International) — Investors have emerged seeking global expansion.
  • Private pension funds — A source of new capital; another example of the quest for returns on noncorrelated risk.

Although the industry has been profitable in recent years, pursuit of robust returns, achieving profitable premium growth, and the reality of rising expenses for technology and talent have driven the desire to acquire in deference to an organic build-out. Traditional and alternative sources of capital are shifting the shape of the industry for the rest of the decade.

Other observations
Beyond the primary drivers of M&A, several other factors play a part:

  • Large enterprises focusing on core businesses are likely to shed noncore businesses, providing opportunities for small- and middle-market companies to enhance scale, enter complementary lines, diversify product offerings and broaden distribution channels.
  • Strategic acquirers will pursue high-quality targets.
  • Opportunistic acquirers will behave more speculatively to avoid being squeezed out of the action or risk falling behind from being idle.
  • Some large, well-funded firms are content to sit on the sidelines, optimizing their current platform, while watching industry developments carefully.
  • Stakeholders’ expectations for returns remain high.
  • There is no perfect deal — alternative and hybrid structures will continue to emerge.

The opportunity
Grant Thornton LLP’s Business Advisory Services (BAS) Insurance practice is well-versed in the competitive pressures faced by the industry and the challenges of capital utilization. The practice recognized early in 2014 that new opportunities with existing and new clients were emerging and started engaging clients about their acquisition plans and needs.

The new Insurance sector M&A Advisory Services offering has been fashioned as a collaborative initiative supported by the resources and experience from across the firm, including, but not limited to, Transaction Advisory Services, M&A Advisory, M&A Tax, Tax, Cybersecurity and BAS.

How we help: Strategy, due diligence, integration and transformation
Many clients and prospects may be among the industry leaders in strategic thinking, but are encumbered by limited resources and require third-party know-how for acquisition plan formulation, opportunity (target) assessment and execution. We provide insight and experience on the following strategies through the initial stages of the acquisition process:

  • Regulatory strategy
  • Tax strategy
  • Transaction strategy
  • Potential target identification

Further, in targeted acquisitions, the depth and breadth of potential latent liabilities in active, run-off and shell companies requires expert due diligence from many disciplines. The objective at this stage of the acquisition is reducing the risk of the investment decision-making process by providing data validation, comprehensive assessments of strengths (and, more importantly, gaps) and discovering facts to support the investment thesis. Exposures that potentially undermine strategic objectives must also be dealt with. We explore all facets of the acquisition target in these critical areas:

  • Financial
  • Regulatory
  • Tax
  • Technology
  • Operations
  • Human resources
  • Corporate culture

Acquiring companies must place significant emphasis on the success of the integration. In planning and executing around post-acquisition activities, the direction is set to pursue realization of the acquisition strategy. While many acquiring organizations are acutely aware of important decisions involving business retention, technology platform selection, cultural indoctrination, the broad array of issues and decisions around human capital, and other matters of financial consequence, working with Grant Thornton’s Insurance M&A Advisory Services can help you optimize realization. We offer the following services to enhance integration success:

  • Transition planning
  • Confirmation of alignment between strategic intent and the integration process
  • Identification of sources of value
  • Capturing value
  • Risk mitigation
  • Transition execution

Transformation for realization, the final important stage of acquisition and integration activity, is not always well-executed by acquirers. At this point in the acquisition process, managing to achieve the transaction’s value is as critical as implementation around planned actions that improve performance of the combined organization. Insurance M&A Advisory Services provide tools and oversight that:

  • Measure realization and propose adjustments to stay on track
  • Provide guidance and recommendations that build upon the combined organizations’ new foundation
  • Ensure that performance improvement is measured and provides a sustainable competitive advantage
  • Position the organization to meet future market requirements

Delivering value
Throughout the acquisition cycle, Grant Thornton delivers value beyond the traditional role of project  management. We keep the client close with an approach that is practical, pragmatic, challenges the status quo, and remains  objective and independent of the potential competing interests of stakeholders.

Our Insurance M&A Advisory practice has deep industry and functional knowledge. We understand  insurance sector
consolidation drivers and we have extensive transaction experience. We provide comprehensive thought  leadership and collaborate with clients on solutions and best practices. To learn more, visit

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John Swanick
US Insurance Practice Leader
Business Advisory Services
T +1 215 814 4070

Matthew Tierney
Northeast Insurance
Practice Leader
Business Advisory Services
T +1 215 701 8822

Raymond E. Cox
New York Region
Insurance Practice Leader
Business Advisory Services
T +1 732 516 7635