Willis Re’s global chairman Paddy Jago discusses what is driving M&A in the industry

Diversification, economies of scale, geographical expansion and capital benefits are all major drivers for the current level of mergers and acquisitions (M&A) activity, according to Willis Re’s global chairman, Paddy Jago.

However, too many of the latest wave of M&A transactions are “me too” deals, he suspects, after other more attractive targets have already been acquired by suitors in recent years. “Many companies are looking to what their peer group has done and simply following suit,” he said.

“The fact is that 80% of M&A deals destroy shareholder value rather than create it,” Jago warned.

While not the primary driver for M&A, he also worries that the long periods taken to integrate merging firms can in some cases camouflage the underlying under-performance of the acquirer.

“Not many companies are performing well, in terms of their results in this market environment,” said Jago. “The synergies, cost-cutting exercises and integrating firms together all takes time. That gives you some camouflage if you’re an underperformer.”

In Willis Re’s recent Reinsurance Market Report, the reinsurance broker demonstrated continued erosion of reinsurers’ returns on equity (RoE), even when stripping out catastrophe losses.

Unimpressive RoE coupled with continued excess capital at many reinsurance firms is encouraging management at some firms to spend excess capital on M&A deals or increase share buybacks.

Jago thinks that too much focus goes on the “R” in RoE, as opposed to the “E” side. “A lot of people look at other classes of business to improve returns. They should look at being more efficient on the capital side. The same return on half the capital means you double your RoE.”