Novarica noted in 2019 that there was a notable uptick in M&A activity across the Insurance industry. Persistent, low-interest rates, which seemed in recovery the year before, began moving downward, mitigating the possibility for investment income to offset challenges on the expense side of the actuarial balance sheet. At the same time, many companies began efforts to align capital with future growth strategies. Several transactions took place; many of them offered the acquiring company an opportunity to generate significant economies of scale.
Scale economics plays both ways, of course. Shedding assets can also represent a vital consolidation play, e.g., investment diversification reducing portfolio risk, for companies that can’t get to scale and don’t see other value.
Several recent events illustrate the point. In late March, Zurich announced a transaction to sell an employee benefits unit to Aflac. This deal for the seller is similar to other deals where P/C insurers chose to double down on their core businesses. The agreement provides a potentially important complement to Aflac’s existing voluntary benefits and worksite offerings. More recently, MassMutual announced an intention to “shop” their retirement services unit on the market. These moves are likely portents of things to come as pandemic pressures mount on income statements and balance sheets.
JFK noted in his 1962 State of the Union that “the best time to fix your roof is when the sun is shining.” It is too late to take that sage advice for the pandemic, but this may be calm before the new storm of COVID-19’s aftermath. CIOs and their teams should waste no time preparing if acquisitions or divestitures are part of their companies’ strategic plans.
Key activities include creating a playbook on what to do and when to do it during a transaction. There are definite similarities between these playbooks and DR/BCP efforts. The exact circumstances of these plans may never play out, but planning “on the fly” can produce disastrous economic and operational outcomes. This is not the place for on-the-job training.
Similarly, insurers should create staffing plans early and review them often. The belief that critical staff can perform business-as-usual and M&A tasks simultaneously is a frequent, unfortunate error that can dilute the value of a transaction while also burning out the team. The adverse consequences from a failure to plan are clear for organizations already pressed by COVID-19 response efforts.
Companies that line up reinforcements before striking deals have often taken a vital step to make things happen smoothly and effectively. Third-party expertise that can spot gaps and ramp up talent quickly can start the process on the right foot, even when the purchase is for a business that is similar to others in the carrier’s portfolio. Too many organizations choose to be penny-wise and pound-foolish in this regard, which can produce several suboptimal outcomes.
During the last financial crisis, I had the opportunity to work on nine acquisitions over the course of eighteen months. All these steps contributed to a track record of significant success. Novarica can offer expertise to companies that plan to embark on these types of transactions. Early planning pays big dividends.
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