Delivering on the M&A wave
There has been an uptick in mergers and
acquisitions (M&A) in re/insurance,
with large deals such as AIG-Validus
and AXA-XL making recent headlines. The
management of involved companies are often
excited when presenting the deal, describing
them as adding significant value to the
company and presenting an opportunity to
add expertise and create synergies. However,
the verdict of rating agencies such as S&P
Global Ratings can be more sober.
In a panel discussion titled “Has the M&A
race just begun?”, Eunice Tan, S&P senior
director, discussed with other experts the
potential consequences of the recent tranche
of M&A. Acquisitions may be the only way
to build a meaningful market share in some
territories, Tan said.
Transactions can, however, have many
drivers. “Companies might want to acquire new
distribution channels or new technology, or
they might be forced to change their business
composition due to regulatory changes,” said
David Alexander, head of P&C Reinsurance
Hong Kong & Taiwan at Swiss Re.
Although regulation is becoming
increasingly important in Asia due to the
introduction of new accounting regimes such
as IFRS, acquiring companies may have more
short-term motivations such as financial market
movements opening up new opportunities.
In addition, a particular underwriting
situation may result in M&A transactions.
“If it’s a poor time for underwriting then
there are bound to be some players who are
vulnerable,” Alexander noted.
Reinsurers often benefit from M&A deals as
the companies involved want to avoid negative
surprises during the acquisition process.
“Helping reinsurance clients to manage
their way through M&A could be around the
funding aspects, or risk management of the
process itself, or about execution certainty
by using reinsurance to take away troubles
and blocks of business to make the sale a bit
easier,” Alexander said.
“It could also be around asset management,
reshaping the reinsurance programme or
helping the acquirer post-acquisition to
extract value from the operation,” he added.
He pointed to a case where a US client was
involved in an acquisition and both firms
had almost agreed on the terms, but when
SIRC Today Day 2 Wednesday October 31 2018
Other consequences may be harder to
measure, such as the potential management
time and focus needed for a transaction which
might be a distraction from the core business,
particularly in very large transactions,
Furthermore, the impact on staff and
clients needs to be considered: “No-one wants
to work under a cloud of uncertainty,” he
noted, and a deal may also not play well with
“When we are talking about M&A we are
looking to increase value,” Monica Cramér
Manhem, chief executive officer of Sirius
International, said. And in this respect, the
cultural fit of the entities being combined are
of great importance, she added.
M&A transactions come in cycles, Cramér
Manhem noted. She pointed to the Nordics
where a significant amount of M&A in the
past resulted in a limited number of insurance
and reinsurance companies.
“It is now difficult to penetrate the
market as a foreign company. It is not
really open,” she said. But after market
consolidation through mergers creating
bigger entities, there have been spin-offs
and companies divesting their reinsurance
operations to focus on primary insurance.
In a next step, new operations are being
created, she said.
“Clients, brokers and others require
diversification of the people and the contacts
they deal with,” she noted. l
discussing the transaction with the ratings
agency executives were told that it would
result in a downgrade as the deal would
impact the company’s capital.
A reinsurance deal allowed the firm
to reduce its required capital, bolster the
solvency position and protect its ratings, and
enabled the transaction to be completed.
“S&P traditionally has a neutral view
on M&A, with a slight negative bias,”
Robert Greensted, associate director, EMEA
insurance ratings at S&P, explained.
“Looking back, the reinsurance sector has
had a fairly mediocre track record of M&A,”
S&P leaves the majority of acquirers on
a ‘stable’ outlook but if it includes ‘credit
watch’ there is usually a bias towards the
negative side, he said.
At the same time, M&A transactions can
have positive attributes or consequences such as
an increase of diversification, Greensted noted.
“We see this in a positive light for the
company’s position in a market,” he explained.
In addition, scale can help reinsurers navigate
a challenging operating environment. For
S&P, both are ways of protecting market
positions. “They are unlikely to drive a rating
change positively,” Greensted said.
On the negative side, a significant amount
of goodwill may have a negative impact as
it is not accretive to capital. In addition, a
debt-funded deal may have a negative impact
on both leverage and coverage metrics, he
Speakers at the S&P panel