ey global-insurance-ma-themes-2016

Global insurance M&A themes 2016Will M&A be an enabler for insurance sector transformation?

Fore

wor

d Terms such as the “ return of the megadeal” have been used to describe insurance M&A activity in 2015 . The significant increase in deal values outlined in this document supports this theme, but a more useful description is that 2015 saw a rapid increase in transformational deals.

Industry transformation is therefore the main topic of this review of M&A themes in 2016, as it is the transformation of the insurance sector that has been the key driver of recent large deal activity. This fundamental industry transformation is ongoing and indeed is likely to accelerate, pointing to the likelihood of a highly active insurance M&A market for some time to come.

The theme of transformation also has a fundamental impact on the assessment and practical execution of deals. There has been much focus on the challenge of integration, particularly on the high-profile deals announced in 2015, but for a deal to be transformational requires far more than effective integration (vitally important as that is). Enabling genuine business transformation through M&A will be a critical topic for insurance management teams and investors in 2016 and beyond.

In this document, we explore some of the key sector transformational themes driving M&A, and we also discuss how insurers are reacting to the operational challenges of integration and transformation.

We hope you find this document informative, and we would welcome the opportunity to discuss our views with you.

D av id L ambert G l oba l I n s ur a n ce T r a n s a cti on s L ea d er

ContentsG l oba l i n s ur a n ce d ea l a cti v i ty ................................................................ 2

K ey tr a n s f or ma ti on a l th emes d r i v i n g i n s ur a n ce M & A ............................. 4

C a p i ta l f l ow s .......................................................................................... 8

O utl ook f or 2 0 1 6 ................................................................................. 1 0

M & A i n teg r a ti on .................................................................................. 1 2

M eth od ol og y

► EY’ s Global insurance M&A themes 2016 is based on analysis of ThomsonO NE.com and Mergermarket data from 1 J anuary 2010 to 31 December 2015 .

► We included selected additional transactions that were not in the databases.

► Deals include transactions (announced or completed) in which the target is in the insurance sector.

► Deals in which less than 20% (disclosed) of the company was acquired have been excluded from this analysis.

► Equity investments were included.

► J oint ventures were not included.

► There is no minimum disclosed value deal threshold.

► US health insurance transactions have been excluded.

► The information and opinions contained in this document are derived from public and private sources that EY believes to be reliable and accurate but which, without further investigation, cannot be warranted as to their accuracy, completeness or correctness. This information is supplied on the condition that EY, its member firms, or any leader or employee of any thereof are not liable for any error or inaccuracy contained herein, whether negligently caused or otherwise, or for loss or damage suffered by any person due to such error, omission or inaccuracy as a result of such supply.

2 Global insurance M&A themes 2016

G l oba l i n s ur a n ce d ea l a cti v i ty

N umber of d eals > U S $ 1b

9

14

24

2013 2014 2015

Americas Europe Asia-Pacific Middle East and Africa

Americas Europe Asia-Pacific Middle East and Africa

D eal v alue*

67 % 14% 18%1%

5 0% 40% 10%

1%

40% 37 % 21%

2%

44% 28% 26%2%

2015

2014

2013

2012

5 9%2015

2014

2013

2012

25 % 11%

12%

12%

13%4%

3%

4%

4%

5 2% 32%

49% 35 %

49% 33%

D eal v olume*

2015 hig hlig htsThe year saw a sharp rise in global insurance deal activity, with the total value of insurance- focused transactions exceeding US$ 111b, a record high for recent years. The key driver for this increase in activity was the very large, or “ megadeals,” with the top 10 global insurance deals accounting for 67 % (US$ 7 4b) of deal value.

H owever, in contrast to the global trend, deal values for European insurers were down when compared with 2014. In part, this was due to large prior- year deals, but it does appear that the introduction of the Solvency II Directive has inhibited M&A activity, although this “ overhang” is likely to lead to high levels of activity in 2016.

The top 10 deals include a number of key transformational deals, with significant merger activity among non- life specialty insurers, transactions by brokers to significantly increase their global range of capabilities and solutions, and maj or in-market consolidation in Asia-Pacific. We discuss the transformational themes driving M&A on the following pages.

O f the top 10 deals, 5 were by J apanese groups investing largely into the mature US and UK markets. We discuss the key trends in capital flows on page 8.

7 3 % I n cr ea s e i n th e tota l v a l ue of d ea l s , comp a r ed w i th 2 0 1 4

15 % D ecr ea s e i n th e v ol ume of d ea l s , comp a r ed w i th 2 0 1 4

17 4 % I n cr ea s e i n th e a v er a g e v a l ue of d ea l s , comp a r ed w i th 2 0 1 4

5 N umber of d ea l s a bov e U S $ 5 b

* Figures may not add up to 100% due to rounding

U S $ 111b

U S $ 64 b

U S $ 4 0b

U S $ 4 9 b

5 65

664

5 02

5 4 4


T op 10 d eals by d isclosed v alue

D eal activ ity by g eog rap hy * *

D ate T arg et T arg et country Acq uirer Acq uirer country * V alue ( U S $ m)

J ul 2015 Chubb United States ACE United States 28,5 34

J un 2015 Towers Watson United States Willis Group United Kingdom 8,113

J un 2015 H CC Insurance United States Tokio Marine & Nichido Fire J apan 7 ,5 04

J an 2015 Partner Re B ermuda Exor Italy 5 ,266

Sep 2015 Amlin United Kingdom Mitsui Sumitomo Insurance J apan 5 ,263

J ul 2015 StanCorp Financial United States Meij i Yasuda Life Insurance J apan 4,961

Sep 2015 H uaxia Life Insurance China B aotou H uazi China 4,944

J an 2015 Catlin Group B ermuda X L Group B ermuda 3,928

Aug 2015 Symetra Financial United States Sumitomo Life Insurance J apan 3,7 92

Nov 2015 Mitsui Life Insurance J apan Nippon Life Insurance J apan 2,7 43

Americas

Asia-Pacific

E urop e

Mid d le E ast and Af rica

2015

2014

2013

2012

3 3 5

14 4

24

62

3 4 5

18 1

17 8

215

7 8

62

7 2

26

16

22

24 6

269

2015

2014

2013

2012

2015

2014

2013

2012

2015

2014

2013

2012

15 , 19 5

19 , 9 25

1, 265

7 5 , 08 4

3 1, 4 8 9

16, 204

21, 606

25 , 3 04

15 , 05 5

13 , 5 8 8

7 9 9

8 3 8

5 66

12, 667

8 , 3 23

6, 15 5

2015

2014

2013

2012

2015

2014

2013

2012

2015

2014

2013

2012

2015

2014

2013

2012

V olumeV alue (US$ m)

* Acquirer’ s main country of operations* * Deal data is by the geographical location of the target company


K ey tr a n s f or ma ti on a l th emes d r i v i n g i n s ur a n ce M & A

Insurers are not simply engaging in large deals in search of greater scale. The key driver has been the underlying transformation of the sector. Large- scale M&A is playing its part as one of the key enablers for transformation — not the only enabler by any means, but one of the key ways of accelerating the j ourney toward a desired future model.

There are many components driving the current need for transformation, and management teams are grappling with a complex combination of these emerging and developing trends.

C ap ital op timiz ationRegardless of regulatory regime, ongoing intense pressure on margins is forcing insurers to look at every potential way to improve returns on capital. Enhanced data and management information tools are enabling management teams to reassess returns and to be far more sophisticated in assessing and managing risk.

Insurers are taking a more holistic view of the types of aggregate underwriting and other risks taken across their organizations. The use of “ global capital markets” in the transfer of risk (e.g., use of reinsurance, structured insurance solutions and other risk transfer mechanisms) also continues to increase in sophistication and application.

The hunt for enhanced yield is pushing new approaches to asset allocation and asset liability matching. This requires the development (or acquisition) of enhanced capabilities in originating new asset classes, and in structuring and monitoring such assets in a manner that ensures effective use of risk capital.

T he d riv e f or red uctions in op erating and p roj ect sp endO ngoing pressure on premium rates, the continuing outlook for low investment yields and other factors impacting profitability have once again put the spotlight on expense efficiency. A number of business models will not be sustainable unless management teams can find ways to achieve significant reductions in ongoing expenses. This is leading many groups to seek enhanced margins through merger synergies, but expense management and rationalization are also driving groups to consider divestment of businesses as a tool to achieve overall simplification and expense efficiency.

I nv estment into technolog y and enhanced

customer p rop ositions

C ap ital op timiz ation

T he continuing need f or g row th, scale and new

cap abilities

T he d riv e f or red uctions in op erating

and p roj ect sp end

T ransf ormational themes d riv ing M&A


El i te s p or ts tea ms ta l k a bout “ ma r g i n a l g a i n s , ” th e con cep t th a t ev er y s i n g l e f a ctor a f f ecti n g p er f or ma n ce s h oul d be a n a l yz ed cl os el y a n d ev er y i mp r ov emen t, h ow ev er s l i g h t, w i l l con tr i bute i n cr emen ta l l y to th e d i f f er en ce betw een s ucces s a n d f a i l ur e. As i n s ur er s tr a n s f or m, ma r g i n a l g a i n s a cr os s th e w h ol e r a n g e of f a ctor s a f f ecti n g r etur n on ca p i ta l a n d w i d er commer ci a l s tr en g th ma y w el l s i mi l a r l y a d d up to th e d i f f er en ce betw een s ucces s a n d f a i l ur e.

Proj ect expenditure has been very high across large parts of the insurance sector and is likely to remain high as insurers continue to deal with maj or changes in regulatory requirements, rapid shifts in consumer behavior and expectations of service, and the need to invest in new digital capabilities. The size of this proj ect spend across the sector is a compelling part of the investment rationale behind mergers of peers. Such businesses can either continue to separately spend large amounts on new proj ects, or they can combine, with reduced aggregate spend and reduced execution risk.

T he continuing need f or g row th, scale and new cap abilitiesInsurers, like all businesses, need to search for profitable growth. This continues to drive acquisitions into higher growth and emerging markets, but with ongoing transformation and increased sophistication across the sector, there is also a drive to achieve growth in new areas of capability. In addition to the acquisition of product and geographical capabilities in the insurance manufacturing space, the search for new capabilities is also manifesting itself in areas such as distribution, wider insurance consulting and risk management, and technology.

I nv estment into technolog y and enhanced customer p rop ositionsTechnology will transform all elements of the insurance value chain.

It remains to be seen whether digital proves to be an opportunity or a threat to incumbent insurers. What is beyond doubt is that rapid technological change is affecting every facet of the insurance value chain, from customer acquisition, predictive analytics, risk management and telematics, and other developments, through to potentially revolutionary changes to insurance administration from technologies such as blockchain and robotics. Indeed, digital technology is affecting the very nature of insurance risk, requiring new understanding of the impact on traditional risk types (e.g., motor, home) as well as on emerging risks such as cyber.

“ Convergence” between the insurance sector and other nonfinancial sectors (notably, technology and consumer-related businesses) is driving a blurring of the traditional lines between sectors, with collaboration and cross- investment a growing trend.

In this context, the type of M&A activity seen to date, including insurers establishing ventures to invest into developing fintech (financial technology) companies, is surely just the tip of the iceberg of what is likely to be a series of increasingly large and strategically important transactions at the interface of insurance, technology and other relevant sectors.


Achiev ing ef f ectiv e transf ormationManagement teams should not necessarily contemplate M&A simply because their competitors are doing so. H owever, if insurers see their competitors fundamentally transforming their businesses, then they do need to react accordingly. That is exactly what management teams the world over are doing currently.

Carrying out a transaction, even a “ megadeal,” does not in and of itself create transformation. Transactions simply create the conditions for transformation to occur. Transformation requires a fundamental re- evaluation of how the combined businesses will operate after the deal — so it is a lot more than a “ standard” acquisition and integration process. It is therefore imperative that, post- merger, management teams continue to look closely at the strategic obj ectives of the deal and ensure that they are pulling all of the levers available to achieve the target end state.

H ow transf ormation is p lay ing out in k ey subsectors and reg ionsDifferent elements of the insurance industry are transforming and evolving in different ways, with a consequential impact on M&A activity. In broad terms, the theme of capital optimization plays a greater role in underpinning deal rationales in the life sector, while non- life sector activity has tended to be driven more by the themes of cost efficiency and capability build-out. That said, capital optimization, cost efficiency, enhanced capabilities and technology permeate the vast maj ority of insurance M&A value assessments.

C a r r yi n g out a tr a n s a cti on , ev en a “ meg a d ea l ” , d oes n ot i n a n d of i ts el f cr ea te tr a n s f or ma ti on . T r a n s a cti on s s i mp l y cr ea te th e con d i ti on s f or tr a n s f or ma ti on to occur .

Below, we discuss how specific trends are emerging as a result of these overall transformational themes.

I ncreasing p olariz ation betw een “ old ” and “ new ” businessesAs insurance groups focus their efforts, and capital, on their forward- looking business models, the gap will widen between old and new in terms of customer interface, product design, administration, and many other areas of operations and policyholder interactions. As a result, the increasing expense strain from managing legacy operations will continue to present a compelling case for divestment of legacy businesses to closed and runoff consolidators.

That said, legacy businesses and portfolios generate significant cash flow for many insurers. There will be a period during which insurers need to balance the benefits of retaining legacy back books with the longer- term necessity to create cash- generating “ new” businesses.

S trateg ic d ecisions in a S olv ency I I env ironmentThe buildup to the implementation of Solvency II generated intense speculation about M&A activity but did not lead to a rapid increase in deal activity. If anything, uncertainty over the eventual impact of Solvency II has acted as an inhibitor of deals.

H owever, insurers are now making M&A decisions based upon a clear assessment of their current and proj ected capital positions. The new reality of operating within a Solvency II environment is requiring management teams to set strategy in a very different way than under previous regulatory regimes. Smaller insurers are taking actions to increase their capital flexibility (including seeking capital raises, mergers and sales of non- core portfolios), and insurers large and small will consider M&A as a tool for optimizing and refocusing capital.

Solvency II is not only affecting M&A and capital allocation decisions by European insurers. Changes in capital requirements


I nsig hts f rom our 2016 Global Corporate Divestment StudyEY’ s 2016 Financial Services Global Corporate Divestment Study, i n d i ca tes th a t ma n y i n s ur er s a r e n ot n eces s a r i l y p l a n n i n g to d i v es t but w oul d be op en to op p or tun i s ti c a p p r oa ch es . T h er e i s cl ea r l y a l a r g e ma r k et f or i n s ur a n ce bus i n es s es a n d p or tf ol i os , w i th s ubs ta n ti a l ca p i ta l bei n g d ep l oyed by i n d us tr y con s ol i d a tor s , r ei n s ur er s , As i a -Pacific investors, major private equity players a n d oth er s . I n s ur a n ce comp a n i es n eed to be better p r ep a r ed to mov e w h en th er e i s a r ecep ti v e buyer a n d a s tr a teg i c r a ti on a l e to d i v es t.

for certain risk types are driving the creation of significant capital flows to and from Europe, perhaps the most notable example being the large amount of longevity risk reinsured from Europe to North America during 2015 as European insurers sought to optimize their capital position in the run- up to Solvency II. Such global “ capital markets” in insurance risk are likely to continue to adapt and evolve rapidly, in line with the increased sophistication in capital and risk assessment.

“ Are w e in or are w e out? ”Insurers have developed diverse businesses across a number of markets, many of which are individually subscale but represent important bridgeheads into future growth markets. Transformational trends driving capital and expense rationalization, and ruthless focus on core strategic priorities, are increasingly raising a question for certain markets: “ are we

in or are we out? ” Many groups will decide emphatically that they are in for the long term, and they may be able to increase the scale and margins on such businesses through consolidation with the operations of those who decide to retrench from certain regions, niches or products.

Simplification through M&ASimplification through M&A may sound like an oxymoron, but as insurance groups seek to simplify their businesses — focusing management time, investment and capital on those activities critical to the future strategy — then disposal of non- critical businesses becomes a key enabler of simplification. The simplification agenda requires a thorough understanding of the full cost of doing business across all product lines and locations, whether that is incurred directly on a local basis, or a cost incurred at a holding company or group oversight level.


Capital flows

2015 M&A activity reflected strong demand from buyers and providers of capital to the insurance sector, and a supply of assets by insurers open to offers from potential bidders. This trend appears to be set to continue, if not accelerate. A number of the factors described earlier driving the industry to transform are encouraging insurers to divest of operations that become non- core to their future strategic areas of focus, while at the same time there is significant capital available to the sector.

K ey trend s in terms of incoming cap ital ► There are significant capital flows coming out of Asia-

Pacific, most notably from Japan and China, into mature insurance markets in North America and Europe. During 2015 , J apanese insurers invested US$ 21.9b in acquiring North American insurers and US$ 5 .4b into European insurance acquisitions.

► Private equity (PE) activity does not feature strongly in the data on 2015 deal activity, as it has been dominated by large corporate transactions. H owever, sophisticated PE investors, and other financial investors are playing a very active role in a wide range of M&A opportunities.

► Shifts in the global “playing field” through the introduction of new regulatory solvency rules are creating markets for the acquisition or divestment of certain risk types.

► This flow of incoming financial investment is consistent with results from EY’ s 2016 Global Corporate Divestment Study, which saw j ust 29% of insurance executives identifying private equity and sovereign wealth fund investors as likely buyers of insurance assets, compared with 42% in 2015 . Results from that study also show a shift in the types of buyers for insurance assets, with 5 2% of insurers seeing foreign emerging-market financial institutions as likely buyers of insurance assets, compared with j ust 21% in 2015 .

T he challeng e of being comp etitiv e in auction p rocessesThe ongoing flow of new investor types i n to ma tur e i n s ur a n ce ma r k ets i s cr ea ti n g ch a l l en g es i n a ucti on p r oces s es both f or bi d d er s a n d s el l er s . S el l er s w i l l n ot l ook s i mp l y f or th e bi d d er w i l l i n g to p a y th e h i g h es t p r i ce. O th er con s i d er a ti on s , s uch a s ea s e of tr a n s i ti on , s a f eg ua r d s f or oth er s ta k eh ol d er s ( cus tomer s , emp l oyees , bus i n es s p a r tn er s a n d ma n y oth er s ) a n d cer ta i n ty of ex ecuti on , a r e a l w a ys k ey. As w e s ee l a r g e insurers with high-profile brands divesting of bus i n es s es th a t a r e h ea l th y but l es s r el ev a n t to th ei r f utur e s tr a teg i es , ch oos i n g th e r i g h t bidder will increasingly focus on nonfinancial con s i d er a ti on s i n a d d i ti on to th e a l w a ys -i mp or ta n t f a ctor of p r i ce.

W e a r e s eei n g bi d d er s becomi n g i n cr ea s i n g l y sophisticated in defining their specific v a l ue p r op os i ti on , both i n comp eti ti v en es s of p r i ci n g a n d w i d er con s i d er a ti on s . S uch bi d d er s typ i ca l l y h a v e v er y cl ea r p l a n s f or the target business based upon specific cor e comp eten ci es , th ey us e a r a n g e of r i s k mi ti g a ti on tool s to of f - l oa d r i s k s th a t a r e n ot cen tr a l to th os e f utur e p l a n s , a n d th ey i n v es t v i a s tr uctur es p ut i n p l a ce to a ch i ev e op ti mum capital efficiency.


Asia-Pacific

Mid d le E ast and Af rica

E urop e

13.6

0.4

5 .4

0.5

21.9

0.3

M&A transaction flows in 2015* ( U S $ b)

2.3

Americas

Acq uirer reg ion

Targ

et r

egio

n Am

eric

as

Euro

pe

Asi

a-Pa

cific

Mid

dile

Eas

t an

d Af

rica

Tota

l

Americas 39.6 13.6 21.9 0.0 7 5 .1

Europe 2.3 7 .4 5 .4 0.0 15 .2

Asia-Pacific 0.3 0.1 19.5 0.0 19.9

Middle East and Africa 0.0 0.4 0.5 0.4 1.3

Total 42.1 21.5 47 .3 0.4 111. 5

* Figures have been rounded

1 0 Global insurance M&A themes 2016

O utl ook f or 2 0 1 6

M a r ti n L uth er K i n g J r . op ti mi s ti ca l l y s a i d : “ T h e a r c of th e mor a l un i v er s e i s l on g but i t ben d s toward justice.”

I f th er e i s s uch a th i n g a s a n a r c to th e i n s ur a n ce un i v er s e, th en w e ca n s ee a cl ea r tr en d i n th e s ector becoming far more efficient and effective in its use of capital, using technology to streamline and op ti mi z e cus tomer i n ter a cti on a n d op er a ti on s , a n d p r ov i d i n g a r a n g e of p r od ucts a n d ca p a bi l i ti es th a t i n ma n y ca s es a r e cur r en tl y i n th ei r i n f a n cy.

The inevitability of this trend (or arc) can give confidence to management teams in making the case for major strategic decisions, investments and divestments. However, uncertainties in how this arc will play out drive great uncertainty in fully quantifying potential decisions and valuing potential tr a n s a cti on s .

The question being asked is whether the high level of deal activity will continue through 2016.

We think the key question is: “Will the insurance sector continue to move through a period of r a p i d tr a n s f or ma ti on ? ”

T h e r es p on s e to th a t w oul d be a n emp h a ti c “ yes , ” a n d i t i s our ex p ecta ti on th a t th i s i n d us tr y tr a n s f or ma ti on w i l l con ti n ue to d r i v e h i g h l ev el s of M & A a cti v i ty.

M er g er s of l a r g e a n d mi d s i z ed p eer s to be better p os i ti on ed f or tr a n s f or ma ti on

D i s r up ti on a n d con s ol i d a ti on i n th e d i s tr i buti on s ector

S ol uti on s to l eg a cy — cl os ed a n d r un of f bus i n es s es

N ew con s ol i d a ti on a n d outs our ci n g mod el s

C on s ol i d a ti on a n d con v er g en ce betw een i n s ur a n ce, tech n ol og y a n d oth er s ector s

I n cr ea s i n g p ol a r i z a ti on betw een g l oba l d i g i ta l “ s up er -i n s ur er s ” a n d coun tr y or n i ch e bus i n es s mod el s

S trateg ic op p ortunities f rom the arc of insurance sector transf ormation


O ur p red ictions f or 2016 and bey ond :

The disconnect between “ old” and “ new” business models will drive further deal activity

► Insurers will continue to release capital from legacy portfolios to focus on more profitable segments and new product opportunities.

► Investors will create ever more sophisticated business models to optimize risks and returns on the consolidation of such legacy businesses.

Consolidation among large and midsized insurers will continue

► Pressure on margins, increasing compliance and proj ect spend, and the need to build new competencies will continue to drive compelling valuation cases for the merger of large insurers.

There will be further potential for “ megadeals”

► Global insurers may use the period of rapid transition and change in the sector as an opportunity to make the case for very large transactions.

Large groups will continue to divest of operations and simplify their businesses

► While global insurers are looking at ways to develop and build new capabilities, the need for greater focus and business simplification will continue to drive divestments.

► North American insurers in particular will see activist investors challenge management teams to explore the full extent of potential business simplification.

M&A activity in the European life insurance sector

► We anticipate an acceleration in European life insurance M&A, with disposals of subscale or non- economic portfolios, and a number of insurers taking actions to increase the availability of capital to support new business.

Sector convergence will drive increasing cross-investment between sectors

► B usinesses with leading global capabilities in digital customer experience, access to data and best-in-class analytics will increasingly find opportunities to enter the insurance value chain.

► Partnerships with incumbent insurers and, potentially, acquisition of regulated businesses will become entry routes for such businesses into the sector.

Asia-Pacific investors will continue to be important providers of capital into mature markets

► Asia-Pacific capital will continue to invest into insurance businesses around the world. Such investments will increasingly be into strategic regional or global commercial structures that generate synergies and/or operational excellence.

► J apanese insurers will continue to invest into North America and Europe, albeit not at the levels seen in 2015 .

Technological transformation will take on increasing importance in M&A

► Insurers have been investing into new digital businesses, largely via “ venture” - style structures. As digital business models continue to develop, with potential winners emerging in the race to build leading- edge propositions, then larger- scale M&A is likely.

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T op three lessons learned by insurers f rom their recent M&A integ rationsR esourcing : despite continuing pressure on B AU margins and the scale of regulatory change, releasing sufficient resources to work on the integration is essential to success. O f the insurers surveyed, 5 8% involved > 5 0 dedicated full- time equivalents (FTE) in integration.

P lanning : integration planning needs to commence alongside due diligence and build momentum thereafter. Sixty- four percent of insurers on average now have a synergy and integration plan in place at signing, rising to 100% for deals > US$ 1b in value.

E x ecution: establishing and then maintaining the right integration program governance, management and controls are necessary to ensure that the acquirer and target collaborate effectively, that functional areas do not operate in silos and that integration work streams collectively focus to achieve the target operating model.

M & A i n teg r a ti on

Effective integration is a critical step toward ongoing transformation. There is significant integration a cti v i ty h a p p en i n g i n th e ma r k et a cr os s a l l r eg i on s , w i th a l mos t U S $ 1 b of cos t s yn er g i es bei n g ta r g eted by th e Ace- C h ubb, W i l l i s - T ow er s W a ts on a n d X L - C a tl i n mer g er s a l on e.

P rimary v alue d riv er in recent M&A integ rationsThere is more to insurance M&A than j ust cost synergies; 7 8% of insurers we recently surveyed identified capital synergies and revenues as the primary driver of value in recent transactions.

Whatever the value drivers for any deal are, effective integration planning and rigorous execution are critical to both enable value creation and protect the inherent value of the business- as- usual (B AU) operations of both the acquirer and target.

T arg et op erating mod el d esig nThe strategic rationale for the merger or acquisition and relative size, shape and priorities of the acquirer and target will materially influence the integration strategy selected.

While the finance, treasury and tax functions will in large part become integrated whatever the strategy, for other functions this is much less the case, and time needs to be taken to evaluate the right answer given the specific circumstances of each deal. This variation is in part what drives the depth of levels of integration realized by insurers shown in the graph to the right (“ Depth of functional integration achieved” ), the other key factors being that integrations can require sustained focus for up to three years and willingness to tackle legacy issues.

K ey strateg ic p lanning consid erations

► Will we build on or address legacy issues?

► Will “ one plus one” be enough or even right, given current developments in the market?

► At what speed can we integrate, given our organizational capacity and capability?

► What priority is integration versus other change programs, and what interdependencies exist, e.g., digital, robotics?

► H ow do we maximise the current value of each business once it is integrated?

Source: Striking the Right Chord: M&A integration in financial services, 2015.

Tax

Revenue

CostCapital

22%

22%3 0%

26%


Most imp ortant d eal imp rov ement f actors in hind sig ht

N umber of d ed icated integ ration resources, by d eal v alue*

D ep th of f unctional integ ration achiev ed

Less than US$ 100m US$ 100m — US$ 499m US$ 5 00m — US$ 1b More than US$ 1b

Most important Important

H igh integration (5 – 6) Moderate integration (3– 4) Low integration (1– 2)

Integrate more deeply

More than 5 0 FTE

Finance, treasury or tax

Legal, risk and compliance

H R

O perations

Front office and distribution

IT

26– 5 0 FTE

16– 25 FTE

6– 15 FTE

Integrate more quickly

More integration resources

Start integration planning earlier

More effective governance, decision-making and program management

Communicate better with stakeholders

B etter quality integration resources

12%

22%

18%

16%

10%

14%

8% 28%

22%

38%

32%

38%

34%

48%Manag ing p eop le and cultureH uman capital and the relationships that key individuals hold in the market remain primary assets of insurers that need to be carefully nurtured and guarded during an integration. If managed well, they can help accelerate integration delivery and value realization. They can also destroy value even quicker if allowed. The H R, people and communication work stream(s) are consequently of paramount importance because, among other things:

► Retention measures are often required to “ lock- in” the employees key to organic growth and/or the integration effort, both at the acquirer and target.

► The path to parity of employee proposition needs to be explained early and delivered upon.

► Cultural similarities and differences need to be quickly identified, understood and communicated, and then harmonized in a structured change management program over a sustained period.

► Communication programs need to be proactively influencing employee perception and engaging staff in effective two-way dialogue before the rumor mill takes over and negative messages disseminate across the organizations.

► A significant proportion of the workforce may need to be trained in the use of new policies, processes and systems, depending on the target operating model selected.

31%

17 %

11%

17 % 67 % 17 %

44%44%

67 % 17 %

28%41%



5 2%

34%

31%

28%

23%

20% 5 4%

23%

40%

22%

26%

34% 14%

40%

47 %

32%

5 3%

26%

* Dedicated = > 5 0% of time

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© 2016 EYGM Limited. All Rights Reserved.

EYG No. EG0319

38942.indd (UK) 02/16. Artwork by Creative Services Group Design.

ED None

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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