on track for the payback: realising megadeal potential · 3 world insurance in 2014, swiss re sigma...

On track for the payback: Realising megadeal potential

www.pwc.com/insurance

The bigger the merger, the greater the challenges and complexities. How can you make sure it’s the right deal for your business? And, how can you maximise the full value?

September 2015

PwC On track for the payback: Realising megadeal potential2

Contents

Introduction: 3 Transformational opportunities and lurking pitfalls

The zeal to deal creates inherent risks 4

Identifying and realising the true value 6

Optimising the opportunity by tackling the risks head-on 8

Contacts 10

PwC On track for the payback: Realising megadeal potential 3

Introduction: Transformational opportunities and lurking pitfalls

The combination of readily available capital, new and renewed investor appetite and pressure to build scale and reach into new markets means that multi-billion dollar megadeals are likely to form a significant proportion of the surge in transaction values.

In the face of fragmentation, commoditisation and challenges to underwriting profits and growth within a number of insurance markets worldwide, such large scale acquisitions could deliver significant value. This isn’t just synergies (including underwriting, cost savings, capital diversification and tax efficiencies), but also in taking advantage of the opportunities opened up by new technology and new business models.1 Yet there are also signs that the pressure to deal now and deal big is creating a momentum of its own, which may be divorced from the underlying strategic rationale. There may be some opportunism in the flurry of activity. There may also be a degree of anxiety in the decisions as boards worry whether their businesses are competitive enough to succeed in an increasingly consolidated marketplace. Some may also be concerned that their companies could themselves fall prey to a takeover if they fail to join in the M&A wave.

The size of a megadeal can often heighten the hazards of simply following the market lead. There’s a potential danger that the strategic credibility of the merger is defined by its size rather than the genuine suitability of the fit. The bigger the transaction, the greater the complexities and potential pitfalls. The

risks can be compounded by the speed with which some megadeals are being negotiated. Experience of previous takeover surges shows how easy it is to get swept up in the market momentum and allow value to be destroyed through flawed takeover rationale, targeting or failure to manage integration in a systematic way. But the alternative of doing nothing can be equally damaging as companies find themselves either struggling to compete on cost or playing catch-up in new growth markets.

Maximising valueSo how might value from megadeals be maximised?

Drawing on our wide-ranging deal experience, this viewpoint looks at how to tackle the key challenges of large acquisitions, from designing the right competitive platform and determining M&A’s role in building it, though to targeting and valuation, and finally integrating the merged enterprises. This isn’t a risk averse perspective – there has to be a willingness to take bold decisions to realise the value potential in today’s M&A market. What we do offer is a way to make sure that these decisions are fully informed and that your business has the right strategies, employee engagement and organisation-wide mobilisation to make them work.

If you have any queries or would like to discuss any of the issues in this paper in more detail, please speak to your usual PwC representative or one of the authors listed on page 10.

2015 has seen record levels of insurance M&A as the much anticipated sector consolidation (and new capital inflows) have begun to materialise (and indeed accelerate).

1 WeexplorethecompetitivedevelopmentsandvaluepotentialwithintheglobalinsurancemarketinInsurance2020andbeyond:Necessityisthemotherofreinvention(www.pwc.com/insurance/future-of-insurance)


The zeal to deal creates inherent risks

As Figure 1 highlights, the value of insurance targeted M&A up to the end of July 2015 was more than $80 billion, a record high for the first seven months of a year.2 A significant number of the acquisitions announced so far this year are megadeals – volumes are down, but values are up in 2015. Some of the rationale for these megadeals is familiar, including the slow growth and price pressures in mature markets – gross written premium values in advanced markets grew by just 2.9% in 2014.3 One result has been further consolidation in a bid to sharpen efficiency (including capital, underwriting and taxation), cut costs and strengthen margins. What has changed is the threshold for what is deemed to be sufficient scale to compete, which is not just spurring mid-size insurers and reinsurers to consider mergers, but also some of the market’s largest players.

Yet in an industry being reshaped by the transformational impact of new regulation, new technology, changing customer expectations and shifts in global economies, the drivers for M&A go beyond simply synergies and scale. This includes capabilities extension as insurers and reinsurers look to acquire the insight, service and underlying customer-centricity needed to keep pace with changing market expectations and capitalise on higher margin opportunities.

Solvency II is changing the capital and cost profile of insurance and reinsurance in the EU. Some businesses may find that certain products are less profitable or even unviable as a result, though acquirers with greater scale, cost competitiveness and/or understanding of the risks could still make good returns. Under Solvency II, there is the additional attraction of using acquisition to boost diversification, which could offset the risks and hence reduce the capital demands from capital-intensive products.

Further drivers that are being felt in the market at present include private equity, which is leveraging debt and credit fund expertise to facilitate asset heavy deals. There is also new ‘disruptor’ capital coming into the market, much of it from Asia, which has on occasion been prepared to follow aggressive market entry pricing strategies.

As the market momentum continues to build, we could see even more transformational moves. Possibilities include a merger between leading global players or a takeover of a developed market business by leading emerging market group. Also on the cards is investment by a technology or telecommunications giant seeking to acquire an underwriting platform and ready-made market share to align with its own analytics and distribution capabilities.

Losing sight of the prizeAmid all the flurry of activity, a primary concern will always be the risk of losing sight of the strategic rationale as deal-making becomes an end in itself. The deal may be sealed successfully, but if the fit and potential uplift are wrongly assessed or aren’t subsequently realised, a huge amount of value can be destroyed.

While the economic rationale for M&A within the insurance sector has been well-established for some time, few could have predicted the acceleration in activity and the scale of many of the deals we’ve seen so far in 2015. With increased scale comes increased risk, but also opportunity.

1

2 DealogicM&AStatShot,31July2015

3 Worldinsurancein2014,SwissReSigma


Senior executives within large insurers and reinsurers generally have a tried and tested playbook for M&A and support teams to move deals forward. But their standard playbook may not be enough in the face of the heightened size and complexity of a megadeal, its unpredictability, and the higher volume of requirements across the enterprise necessary to execute them successfully. The changing competitive landscape also means that deal partners may also be different from the standard targets of the past. For an insurer, this could be a reinsurer, insurance-linked security (ILS) fund or even a technology or telecoms company.

In the next section, we look at what experience tells us about how to address these megadeal demands.

Yet in an industry being reshaped by the transformational impact of new regulation, new technology, changing customer expectations and shifts in global economies, the drivers for M&A go beyond simply synergies and scale.

Source:DealogicM&AStatShot,31July2015.*Includesannouncedbutnotcompleteddeals

2008

n ValueofdealsuptoendofJuly n Restofyear NumberofdealsuptoendofJuly

$bn Deals

150 900

125 750

100 600

75 450

50 300

25 150

0 02009 2010 2011 2012 2013 2014 2015*

Figure 1: Annual global insurance M&A


Identifying and realising the true value

1 Designing a platform for future profitability and growthInsurance is an industry in transformation. It’s vital to find ways to sustain growth and keep pace with market expectations or risk being marginalised. The disruptive impact of technology, regulation and new entrants mean that key strategic considerations go beyond simply securing sufficient reach and scale.

It’s therefore important to develop a clear vision for how and where your organisation intends to compete. What are the most important business lines and markets to target? Where are the opportunities ten years from now? What analytical and operational capabilities do you need to meet changing customer expectations? What are the key strengths of your brand and how can you reinforce them? What technology would best allow you to compete now and in the future? What role would M&A and/or organic growth play in creating this competitive platform?

With this vision in place, your board can identify the most suitable targets and begin assessments and preliminary negotiations. And because the rationale and analyses are clear and well-conceived up front, it’s possible to move quickly but with less risk, confident that the merger target is the right fit.

2 Assign clear accountabilityIn the ideal acquisition scenario, a business unit (BU) leader would be put in charge of driving the transaction because the acquired operations fall within his or her current scope. The BU leader evaluates the technology, the customers, the marketplace and core business functions. He or she would also take ownership of the integration and the combined performance plan. Consolidation-oriented deals tend naturally to include strong BU accountability because of the high degree of operational overlap. However, in capabilities extension megadeals, almost by definition, BU accountability doesn’t exist. It’s therefore important to assign board-level ownership for the evaluation and delivery of deal objectives.

3 Realistic synergy valuationIt’s important to take a clear and objective look at exactly what each partner brings to the combined entity and the extent to which they make a good fit, which would include looking at the compatibility of the brands, as well as the markets and operational capabilities.

There has historically been a tendency to over-estimate synergy values (or rather under-estimate the challenges of realisation), especially in relation to revenue synergies. Cost synergies should generally be assigned more weight, especially in a merger of mature businesses.

Revenue synergies are still important, however. The reasons they are less well realised often come down to execution. We’ve seen insurers failing to get the most from capabilities extension transactions because they are reluctant to prioritise revenue synergies. And that can prevent the product or

All deals are tricky. But megadeals demand a stronger business case and considerably more care. We believe that the best way to manage the heightened risks and complexities and realise the value potential from the megadeal is through a more informed and systematic approach to strategic planning, target identification, valuation, due diligence and post-deal integration.

2


Despite the size and complexity of megadeals, insurers sometimes feel pressure to accelerate due diligence, either because of fears that the deal will lose momentum or in the belief that the condition and potential of a large public company should be fairly transparent.

solution transformation needed to address the demands of new technology or shifting customer demands.

4 Know what you’re buyingDespite the size and complexity of megadeals, insurers sometimes feel pressure to accelerate due diligence, either because of fears that the deal will lose momentum or in the belief that the condition and potential of a large public company should be fairly transparent. As a result, merger partners may know remarkably little about each other and risks synergies, capabilities and revenue assumptions aren’t properly vetted.

It’s clearly important to know just what you’re buying and given the size of the target that requires rigorous and extensive diligence across all areas. Mergers between mature businesses demand particular care as they themselves may be the products of successive acquisitions, in which many of the legacies, inefficiencies and incompatibilities have been worked around rather than resolved.

In the most successful deals, boards have taken the lead in determining diligence priorities and reviewing detailed (versus highly summarised) diligence findings; interacting with third-party due diligence advisors on topics including scope, access, and key findings; and reviewing pre-announcement integration plans and budgets.

5 Tell it how it isPerhaps our single biggest recommendation is to consider how you can ensure investors, employees and customers understand the deal objectives, the integration activities necessary to achieve those goals, the metrics used to measure whether those goals are being met, and who is responsible for delivering them. When big companies are coming together, it’s especially important to explain the path to how synergies will be realised.

The big dangers are that the benchmarks for accretion aren’t determined up front or that there is a vacuum in communications that encourages staff to prioritise personal survival over broader integration and deal value realisation.


6 Determine the role of acquired talentLeaders should identify which people in the acquired organisation are adding exceptional value and will therefore be vital to the success of the merged organisation in areas such as innovation, expertise or business relationships. It’s then important to judge whether these individuals would want to stay and contribute, and then develop retention strategies alongside a succession plan if they choose to leave. This process will involve significant relationship building, particularly with deputies and promising managers at the acquired company, who might be able to step in and run the business unit over a longer term.

7 Manage the integration as a business processWhile the champagne often flows when the contract is signed, such celebrations are premature. Mergers don’t make money in themselves. Acquisitions are essentially a bet, in which the buyer gives itself the opportunity to either make significant returns from bringing the business into its existing portfolio and realising the anticipated benefits or destroying value through failure to integrate the target effectively. To ensure the transaction delivers the anticipated value, the governance process demands management involvement, clear and transparent planning at the point of acquisition and active board-level oversight.

Unfortunately, however, closing the deal can easily become an end in itself, leaving little time to think about how to really make it work in practice. The odds of success are often lengthened by the fact that the people who will be responsible for implementing the merger are often not sufficiently involved in the M&A process until the ink is already dry and those responsible for driving the deal have moved on. It’s therefore essential that business management is involved from the outset in the development of a clear and rigorous integration plan.

The larger the transaction, the greater the need for a well-defined business process to focus resources and capital on the right activities at the right times and to capture cost and revenue synergies as quickly as possible. This is especially true for both consolidation and capabilities extension deals wherein two big companies are coming together with a large number of employees and customers.

As such, it’s important to develop a clear understanding of the sources of value from the deal and draw up a plan for laying the foundations for realisation in the crucial first 100 days. The plan should set out the roadmap and resource needs and empower leaders to keep the integration on track by giving them latitude to make quick decisions regarding organisation, people, customers, and priorities — and hold these leaders responsible for communicating those decisions to customers, employees, shareholders, and partners.

Leaders should identify which people in the acquired organisation are adding exceptional value and will therefore be vital to the success of the merged organisation in areas such as innovation, expertise or business relationships.


Optimising the opportunity by tackling the risks head-on

Acknowledging these challenges and tackling them head-on drive success. When executed correctly, these transactions can boost efficiencies, increase revenues, and propel your business ahead of competitors. Some might even have the potential to reshape the industry.

By their very nature, megadeals require more justification, more detailed evaluation and more effort to make them work. The most successful are marked out by a clear and up-front sense of what kind of businesses would offer the right fit over the long-term. This is underpinned by rigorous diligence, effective communications and clear planning and ownership of integration.

The challenges associated with insurance megadeals are significant and vary with the type of deal and nature of the buyer and the target.


Contacts

Stephen O’HearnGlobal Leader, Insurance Partner, PwC (Switzerland) +41 (0)44 628 0188 [email protected]

James TyeUK Insurance Deals Leader Partner, PwC (UK) +44 (0) 20 7212 4347 [email protected]

Gregg NahassUS and Global Leader, M&A Integration Partner, PwC (US) +1 (213) 356 6245 [email protected]

J NeelyGlobal Leader, Strategy& Deals Partner, PwC (US) +1 (216) 696 1674 [email protected]

John MarraGlobal and US FS Deals Leader Partner, PwC (US) +1 (646) 471 5970 [email protected]

Arthur Wightman Territory Leader and Insurance Leader Partner, PwC (Bermuda) +1 (441) 299 7127 [email protected]

Michael MarianiUS Insurance Deals Advisory Leader Partner, PwC (US) +1 (602) 364 8486 [email protected]

Matthew Phillips Asia FS Deals Leader Partner, PwC (Hong Kong) +852 2289 2303 [email protected]

Christoph Baertz Switzerland FS Deals Leader Partner, PwC (Switzerland) +41 (0)58 792 1418 [email protected]

Leslie Fenton Managing Director PwC Corporate Finance LLC +1 (312) 298 5866 [email protected]

Chris Samson Delivering Deal Value Leader Partner, PwC (UK) +44 (0) 20 7213 1444 [email protected]

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on track for the payback: realising megadeal potential · 3 world insurance in 2014, swiss re sigma...

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