M&A advisors have had plenty to keep them occupied in recent times.  The M&A market for insurance has been buoyant in 2015: 230 deals were closed for a total value of EUR 129 billion.  According to research by Willis Towers Watson this will intensify in the coming years with more than 80% of insurers surveyed indicating they plan to acquire by 2019.   It’s perhaps no real surprise.  In a business environment with few organic growth opportunities, M & A allows insurers to extend customer reach and grow market share quickly (at a price). Excess capital and steady cash flows, relatively cheap financing costs, in-market consolidation opportunities, and a wide interest in growth opportunities in emerging markets have all been contributing factors. But while this provides an indicator of activity in the insurance market, it is just part of a bigger picture. To get the full perspective we could redefine the acronym “M&A” as Mergers and Alliances.  By recognising the value and impact of alliances as well, we take a more holistic view of the market.

Within the traditional world of M&A there have been some interesting trends.

Transformational deals

Transformational deals have returned to the table for some insurers. We’ve seen some successes and some failed attempts. But it’s certainly not for everyone.  These deals attract the headlines since the numbers are big and the risks tend to be high. But looking back over time, market studies show more examples of value destroying M&A than value accretive M&A.  At the same time there are many companies that have done very well without M&A focusing on organic growth and returning capital to shareholders.

In-market consolidation

In-market consolidation, particularly in Europe, is also something we have seen more of, driven among other things by insurers shifting capital allocation from subscale positions to investments in growth markets or simply groups streamlining their portfolios. Investors tend to favour in market consolidation in M&A as it also implies synergies and can lead to more discipline in the market. 

Expansion opportunities

Expansion opportunities exist for insurers in new markets especially in Asia, Africa and Latin America driven by the fast growing middle classes and low penetration rates.  But competition is often intense and this is putting upward pressure on deal pricing.

If the goal is to get closer to the customer and to gain market share, M&A is not the only route to achieve this. The collaborative approach of partnering with top local distributors has been our own favoured path as a Group for some time.  But while the JV space is certainly less crowded, success in this type of “Alliance” means knowing how to identify and work with the right partner.  It means knowing how to leverage a partnership by creating a win-win for both parties.  It means having a shared philosophy towards the customers. And it requires patience and time.  From an M&A perspective one may indeed ask: Do I need to “own it” to be able to benefit? Do I need to fully “own it” to gain access to the new skills that I will need to have in the future?

Disruptors in the insurance market have increased the chance of M&A (Acquisitions and Alliances) between insurers and non-insurers. As insurers we will need to learn new skills and technical disciplines outside of the norm for the insurance industry. This means expanding the scope of knowledge.  But the question again becomes whether or not you have to own it or whether you can import knowledge through other means including an alignment or alliance with a specialist partner.

We will continue to see healthy volumes in M&A and continued consolidation.  Acquisitions, partnerships and alliances will stretch beyond insurance to areas of speciality that enable different products and better services. Achieving scale in the local market will continue to be important, after all insurance remains a local business.  Broadening the scope for expansion beyond traditional M&A to include third party alliances may lead to sustainable growth and a better understanding of the customer. To understand the reality of today’s insurance market means looking beyond the M&A deal statistics towards the wider world of Mergers and Alliances.