“One event away from a hard market” says Willis CEO
By Insurance blogger Kris Oldland
It appears that somebody else has spotted some of those fabled green shoots as Tony Ursano CEO of Willis capital markets and advisory, a unit of Willis Group Holdings made bold predictions that their will be significant increase in Mergers & Acquisitions (M&A) activity within the insurance industry as we move into 2010.
With the soft market creating a greater need for growth, diversification and specialization as insurers fiercely fight for every competitive edge, Insurance Mergers and Acquisitions deals may soon prove to be a much more valid alternative than perhaps they have been, throughout what has been a year of consolidation at best for most of the industry.
Citing key factors such as the increasing importance of the size and scale of companies for ratings agencies, investors and clients alike, Ursano sees the level of M&A activity increasing as financing capacity and terms begin to improve, more positive valuations increase confidence and markets begin to stabilize once again.
A bold statement indeed, especially when we consider that throughout the current year we have seen the average price of M&A deals fall to just 1.09 times the book value. It seems a lot longer than a year ago that M&A activity was a frequent occurrence and the average price in a deal was a whopping 2.46 times book value doesn’t it? The big question is can we really expect the market to come good again just as quickly as it fell apart?
Whilst maintaining such a positive outlook Ursano is no fool and he also remains cautiously realistic, as you would expect from a man in his position, as he reminds us that over 50% of insurance deals have “failed to create shareholder value”. Ursano again cited a number of factors including difficulties assessing the profitability of the target, the volatile nature of financing markets and of course the cyclical nature of the insurance markets as being responsible for the unsuccessful ventures.
However such caution is more to do with the nature of the M&A process rather than the external current external economic factors. If well thought out, thoroughly researched and expertly executed, an M&A deal can of course succeed on a shareholder level. The odds are further improved by a deal which has not only financial but also strategic benefits.
Companies looking to develop their position within the sector through acquisition need to ensure that the deal is positioned correctly and not just a reactionary move. Net earnings, return on equity and book value per share all need to be showing to justify the expense, but also there should be strong reasoned thought behind the strategic benefits to the acquisition. It is also imperative that there is total transparency of loss reserves available and committed financing placed upfront.
Of course one position that is often criminally neglected is ensuring that there is enough incentive to maintain appropriate staffing levels after acquisition – particularly the key management personnel that have made the target company such an interesting and compelling prospect in the first place.
Mr. Ursano certainly seems to think that the next chapter for the industry is not too far away. “We are one event away from a hard market” he said adding that the fantastic strains that are currently being placed on profitability and returns, alongside the reduced investment income now available in the sector and valuations being at an all-time low are creating a buyers market. With over 50 insurance and re-insurance companies trading at below their stated book value Ursano believes it could only take one major investment to “catapult the industry into a hard market.” We can but hope that he is right.
Whatever the next year holds however we can be certain of one thing in 2010 – the rules have changed this time round and it’s going to be one heck of an interesting year.
Thanks for that very useful insight Kris! You can find out more about what businesses are for sale in the Insurance world and register your interest by visiting Insurance Broker Buyers and Insurance Broker Sellers