Large deals are enticing but rare—and smaller ones create more value. Programmatic deal-making would help.
Chicago, IL (Apr. 9, 2021) – It’s easy to understand the allure of really large acquisitions: the best of them can be staggeringly successful. The right large acquisition, carefully mapped to an acquirer’s strategy, can vault a company ahead of its peers into a position of global leadership. Those with well-defined synergies, flawless execution, and skillful integration can also earn enviable excess total shareholder returns (TSR).
But among North American life and property and casualty (P&C) insurers, such acquisitions are rare—and if higher shareholder returns are the objective, even many midsize deals fall short. In our analysis of approximately 250 transactions totaling more than $200 billion in life and P&C carrier acquisitions since 2007, we found that the primary goal for six out of every ten transactions (representing 70 percent of deal value) has been to increase scale. Presumably, the assumption is that the benefits of scale will show up in shareholder returns—but in fact, insurers in both the life and the P&C sectors generated superior excess TSR by focusing on smaller acquisitions and on goals other than building scale. This included, for example, efforts to diversify product offerings or add new capabilities.
Such a track record suggests that many insurers need a different approach to M&A, especially amid the COVID-19 crisis as factors such as sustained low interest rates drag down insurers’ results. As the industry undertakes ongoing restructuring, making a series of small deals could be a bridge to a programmatic approach to acquisitions for P&C and life insurers, 1 increasing the odds of carriers’ success as well as their potential for long-term independence. Across industries, the most effective programmatic acquirers have built organizational infrastructures and established best practices across all stages of the M&A process—from strategy and sourcing to due diligence and integration planning to establishing the operating model. With a brisk outlook ahead for all sorts of deals, the insurance industry has an opportunity to begin adapting those best practices for its own growth needs.
A bridge to programmatic M&A
The obvious advantage of smaller transactions is that they are less complex, usually making the acquirer’s rationale clearer and more straightforward. Smaller deals that are core to an insurer’s existing business often result in lower risk and greater excess TSR compared with large deals. And they are often more cost-effective to finance, whether through internally generated funds, bank loans, or newly issued debt.
An effective M&A process is key. The median TSR for insurance industry acquisitions obscures a striking difference between top- and bottom-quartile performance. For instance, insurers generating top-quartile results delivered excess TSR more than 40 percentage points above the bottom quartile, which suggests a substantial advantage for insurers with superior M&A capabilities. We also found that the insurers delivering top-quartile excess TSR tended to acquire businesses with high returns on invested capital and an improved growth profile as part of a new, larger organization.
Insurers with the most effective M&A processes often take a structured approach—more programmatic and central to a well-planned growth strategy than the approach that many insurers take. Indeed, despite the success achieved by companies in other industries that pursue M&A programmatically, North American life and P&C insurers tend to see acquisitions as one-off or episodic events, pursue large deals, acquire selectively, or even forgo M&A to focus on organic growth. Such approaches carry higher risks than programmatic M&A and are less likely to generate excess TSR. And outperformance of the broader industry over a ten-year period is virtually impossible without a healthy inorganic strategy.
At its core, programmatic M&A means completing many small deals regularly over time rather than focusing on occasional large transactions. It also means divesting to refocus on growth in segments offering attractive returns. If done right, programmatic M&A can increase the odds of generating superior shareholder returns, as shown across multiple sectors.
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