The rate of Merger and Acquisition transactions in the insurance sector is at its lowest point since the lows of the Lehman Shock. A combination of pandemic, social, and economic chaos has led many potential acquirers to hold on to their capital and ride out the many challenges of 2020. However, this too will end, and M&As will skyrocket as firms try to position for the post pandemic era.
The pending reasons for increases in insurance sector M&A activities will include a set of simple aspirations.
Some of these include:
Financial improvement - be it combined ratio, expense ratio, loss ratio or just revenue growth, the science of simple math can make a M&A outcome look great on paper. This drives a lot of transactions and is usually the bestselling angle to shareholders.
Eliminating competitive threats – “if you can’t beat them, buy them” This is an effective way to stop potential competitors from entering your space, and ends up providing what-ever magic the competitor offered to your own capabilities and offerings.
Gaining wallet share – the idea that more products and offerings will drive up the portion of customers spending that is captured is a standard reason in many business cases.
Upping Technology – the cost of digital transformations and core system replacements makes the argument viable. Add in the time it takes for a complete end-to-end transformation of any focus and the opportunity to acquire technology platforms in place, versus building it from scratch is compelling.
Controlling supply-line (Vertical integration) – although falling-out of favor in a current trend of more focus and specialization, buying upstream or downstream partners to unify and control the supply-line is still often used for a rational for M&As.
Scaling a promising business model – insurers may find attractive opportunities in acquiring startups, InsureTechs and smaller players having promising innovative ideas, technology, or business models.
The pending increase in activities will add to an industry where past M&As have left a mixed bag of results. Out of response to market conditions, and the natural maturing of the industry, there has been a continuous stream of M&A activities in insurance. These have had mixed reviews when it comes to achieving the stated objectives and original goals communicated to shareholders and customers. Understanding this phenomenon and the reasons for it, can allow firms to re-approach the objectives and goals and obtain far better business outcomes. To do this Coforge recommends the use of the Post Merger and Acquisition Optimization offering.
Post-Merger and Acquisition Optimization; simply put it is phase 2 of the integration of two or more parties to a M&A transaction. The “post” portion means it typically happens after the original M&A and is used to go that extra step. The step of optimizing the new enterprise by increasing efficiencies and reducing costs. M&As typically fail in some aspect, 50-75%. Looking at the original objectives, how things unfolded, and the result, we can map a final phase of the journey that really helps achieve the original or updated intent of the M&A.
The approach includes the following; First we leverage Coforge's PM&AO Journey tool which maps out the overall path of the event that happened. It looks at the pre-M&A financials and metrics of the separate firms, the TSAs, MSA, “XSAs“, that were transacted during the M&A, and then the Post event financials and metrics. From these we identify target KPIs that need to be achieved, and gaps that need to be filled, to improve the final state. The detailed analysis of current state and necessary actions are then driven by our established tools: Cost Gym and ProcessGym.
A lot of times unexpected cost impacts, operational complications, and changing market forces happen. Usually things that no one foresaw or could have foreseen. For example, most M&As take at least a year to deal and a year to close. A lot happens in this era in 2 years! (or even 10 months…)
This is an opportunity to really map that out using our journey concept and identify what needs to be done to address the unplanned or unforeseen forces. The business case is based on good old-fashioned results. At the highest level in our insurance clients, if we can lower the expense ratio, or improve the combined ratio, then that is a huge win. At a lower level we can target KPIs such as Employee Health Index, System Adoption levels, Customer NPS, or specific productivity and efficiency numbers. Improvement in these KPIs can have a significant and lasting impact on the success of the business. Whether the objective is reducing the expense ratio, improving the combined ratio, or a more focused metric, we will partner with our clients to make sure it is well worth the investment of time and money to execute this offering.
Other uses of this offering include preparations for privatization, preparation for divestitures, or planning for a spin-off of your own Insurtech or start-up. These transactions are also candidates for this offering. It is always a clever idea to plan well and tune things up for these significant and complicated transactions.
The best time to launch this activity is to engage in the original M&A event to plan out the post M&A objectives. This is not always practical but is the best timing. Alternatively, we can engage any time after a merger, acquisition, privatization, or divestiture event. Our methods and approach are flexible enough to use anywhere in the journey and provide substantial improvements.
In conclusion, M&As are a at a 13-year low, not since the full Lehman Shock have, we seen this little action across the insurance M&A horizon. However, once the pandemic is over, many firms will leverage their financial reserves to gain market share. We have already seen an up-tick in acquisitions of Insuretechs as insurance companies up their digital capabilities and market models in preparation for the post pandemic era. So now is the perfect time to act. We see a bright future for clients that leverage Coforge's capabilities across the M&A space and look forward to helping our clients and partners with this exciting offering.