ACORD, the standards-setting body for the global insurance industry, today released the first-of-its-kind study Carrier Mergers & Acquisitions: Major Transaction Value Analysis. The study, which examined the largest M&A transactions over the last decade by insurers in Property & Casualty, Life, and Reinsurance, sought to answer key questions about motivations behind M&A activity, long-term value creation, and barriers and enablers in achieving success.
The study, presented in London today by Bill Pieroni, President and CEO of ACORD, screened nearly 15,000 transactions, focusing on publicly disclosed transactions valued at $1 billion or greater. The deals analyzed in-depth represented a total value of nearly $290 billion, accounting for more than one-third of the value of all carrier M&A transactions worldwide.
Transaction size
Among other factors, ACORD assessed the M&A transactions by deal size and shareholder value at risk (SVAR) to understand how these contributed to long-term outcomes.
Dividing the transactions into quartiles by deal size revealed a “Goldilocks principle” at work — in the long run, mid-sized deals performed better than the largest or smallest transactions studied. The second-smallest quartile — comprised of transactions averaging about $1.4 billion — was the only cohort that outperformed the relevant index over the period studied. The larger and smaller quartiles both underperformed the market.
“While the largest deals may garner headlines and high hopes, they typically are not the most likely ones to create value in the long term. A transaction that is too large may simply be too big for the acquirer to successfully digest,” said Pieroni. “One that is too small, on the other hand, may not draw sufficient attention and oversight. Insurers must carefully consider their ability to manage existing operations without disruption, while effectively integrating the benefits they hoped to achieve by the transaction.”
Segmenting the M&A transactions by SVAR showed similar results, revealing a “sweet spot” for long-term value creation when moderate amounts of shareholder value were at risk.
Buyer motivations
ACORD analysis also supported the identification four major buyer motivations for carriers:
- Scale and Scope: Amortize fixed costs and improve resource access by increasing absolute size, and/or expanding scope across strategic and tactical dimensions.
- Core Expansion: Increase share across areas in which the insurer already executes, such as products, geographies, channels, and customer segments.
- Capability Acquisition: Optimize the risk, cost, and time associated with developing new or enhanced internal capabilities.
- Diversification: Expand portfolio by acquiring new revenue and earning sources.
“The variations in long-term performance were interesting, and sometimes surprising,” Pieroni continued. “The outcomes of these deals differed widely across lines of business, even when motivated by the same rationales.”
In total, P&C carriers experienced higher-than-average returns after M&A transactions in all four motivation categories, with 70% of the P&C deals creating value throughout the analysis period. Diversification was by far the most successful motivation among P&C insurers — driving average TSR appreciation roughly twice as high as other motivations— but was less successful in other lines of business.
Life insurers faced difficulties regardless of the rationale behind the deal, with just 36% of all life M&A transactions creating value. Reinsurers experienced mixed results, creating value in just half of acquisitions overall, with high performance limited mostly to deals motivated by core expansion.
ACORD’s Carrier Mergers & Acquisitions study will be presented at ACORD Industry First on May 21st. To register for this virtual event, please visit www.acord.org/industryfirst.