David Anthony ponders the wisdom behind European M&A activity within the re/insurance sector.
Ever contrary to the conventional wisdom, the majority of insurers appear reluctant to 'buy low, sell high' when it comes to mergers and acquisitions. At a time when the market valuation of many respectable and even prestigious insurance groups is at a record low for recent, there is still remarkably little M&A activity in the European sector, although some institutions are even now admitting to a growing appetite for expansion in North America. In general, though, few insurers currently appear tempted by the relative bargains that may potentially be available in some of Europe's largest markets. This is in contrast to the exuberant 1990s, when aggressively expansionist insurers paid top dollar prices to acquire new brands, new distribution and incremental market share.
In part, this lack of strategic activity reflects the need for retrenchment by many would-be acquirers. Of necessity, some once ambitious groups have become introspective as they seek first to repair their own balance sheets after the depredations to solvency of plummeting asset values and rising liabilities. Others have rediscovered the prudent values of organic growth over growth by acquisition. 'It may take longer but at least you know what is going on' appears to be the philosophy of certain erstwhile acquirers who previously bought in haste only to regret at leisure. If they could turn back the clocks, several once highly rated groups would think twice before buying that big bank to improve product distribution, or before seizing yet another of those once-in-a-lifetime opportunities to acquire a major cross-border operation in order to grow the book and diversify exposure.
Yet even though it is an indisputable fact that 'big ticket' and 'blockbuster' European insurance transactions are currently conspicuous by their absence, it is equally clear that the tectonic plates of the industry continue to shift and that the movers and shakers of the insurance M&A world remain active. For example, groups that previously sought international or even global status now recognise that they do not have to be everywhere in order to be a multinational. Sometimes from weakness, sometimes from strength, such groups now openly concede that they can still aspire to be 'global' without being in many of the world's smaller or more 'local' regional markets. Consequently, earlier forays into Australasia, parts of Asia, Africa, the Nordic region, the Caribbean and Latin America are now being quietly discarded by the likes of Aviva, AXA, Fortis, RSA and Zurich.
Similarly, as insurers discover that successful asset management is a game of scale that can just as well be subcontracted out as undertaken in-house, groups like RSA, Sun Life Financial, Swiss Life and Zurich have opted for tactical disposals in certain areas. In the global insurance super league, only North America, Western Europe and the major markets of Asia appear to count in the prestige stakes. Meanwhile, SCOR is still SCOR without Commercial Risk Partners, Zurich is still Zurich without Converium, Aviva is still CGNU without its North American non-life operations and RSA now exists without its Australian or asset management operations.
So, has the urge to merge disappeared forever? It seems unlikely. As economic and capital market conditions improve, more deals - though sporadic - are expected. For insurers have a conventional wisdom of their own: 'buy high, sell low'. Not as foolish as it may first appear, the assumption is that a perennially underperforming, non-core operation is a distraction to management and should be disposed of as quickly as possible, even if the sale price disappoints.
Similarly, when buying, an expensive insurer is likely to be a successful one and is probably only open to offers because the incumbent management team acknowledges that it lacks the necessary capital to fund expected strong growth. Moreover, a sound albeit 'expensive' entity may be more economical in the long run as its managers may have been under less pressure to under-state liabilities or to run reckless underwriting or investment risks.
A 'cheap' insurance buy may, on the contrary, turn out more expensive. Once the acquirer belatedly looks into all the corners of each and every cupboard at the new subsidiary, the sounds of rattling skeletons, the grinding of legacy IT systems and the shuffle of departing 'key' staff may soon reverberate their way down to the bottom line of the initially proud parent. In other words, seasoned insurers may be right to believe that you get what you pay for.
Consequently, the realities of stressed economies, stressed markets and stressed balance sheets may indeed be inducing a bout of 'back to basics' thinking in the insurance boardroom. However, if the general watchword is once again 'prudence', then experience suggests that tomorrow's reputations may best be made by those who are among the first to break today's conservative mould. Meanwhile, the old drivers of M&A in the 1990s have not gone away: escape from low margins in mature home markets; diversification of risk; development of new channels of distribution; and, less convincingly, the increase of turnover to dilute intractably high fixed costs and expense ratios.
Given a little bit of slack in the availability of capital when investors eventually come round to allowing insurers another last chance to prove their mettle, the M&A bandwagon of investment bankers and buyers will, perhaps sooner rather than later, take once again to the road. And the steady concentration of the world's premium income into the ever larger hands of the world's major financial services groups - both banks and insurers - will soon continue apace.
By David Anthony
David Anthony is a credit analyst with rating agency Standard & Poor's in London.