Megadeals, political instability and strong equity markets deliver M&A underperformance for insurers: WTW

Insurers undertaking mergers and acquisitions (M&A) in 2016 underperformed their non-acquisitive peers for the first time since 2010, Willis Towers Watson (WTW) reported earlier this week.

According to WTW’s latest Insurance M&A Performance Tracker – based on analysis of deals with a value of more than US$50 million conducted in the insurance sector – acquirers lagged the subindustry index by 6.4 percentage points in the period six months before the deal’s announcement to the point six months after the deal closed.

“Although acquirers in the insurance sector haven’t done as well in 2016 as they have in previous years, there are plausible explanations for this,” suggested Jack Gibson, global M&A lead with Willis Towers Watson M&A Risk Consulting. “Since 2008, insurance acquirers have outperformed the market, a trend even more pronounced since 2012. M&A is still beneficial, and it will be interesting to see what the data for 2017 show.”

From 2008 onward, insurers that carried out an acquisition outperformed peers by 3 percentage points, said WTW, a global advisory, broking and solutions company, in a press release. Since 2012, acquirers have traded 4.4 percentage points above their subindustry index.

WTW reported that “a number of factors” accounted for the recent underperformance. First is the general trend for high value and low volume in the M&A market, WTW reported. Only 19 insurance deals were tracked in 2016, and average deal value was almost double the average value in 2015. These figures mirror those from 2010, when acquisitive insurers underperformed.

“The market tends to be nervous around big, transformational transactions and more comfortable when most activity involves smaller incremental bolt-ons,” Gibson said in the release. “All other things being equal, big transactions are generally deemed to be riskier for the acquiring company.”

The drop in deal volumes could be attributed to a slowdown in activity in the life sector; the fall in property & casualty deals was less pronounced.

Strong equity markets may be another factor in the weaker performance of acquisitive insurers, WTW suggested. “Equity markets are doing well, so firms don’t need to do acquisitions as shareholders are rewarding those focusing on organic growth,” said Gibson.

Geopolitical uncertainty and the surprise poll results in the United Kingdom’s Brexit referendum and presidential elections in the United States could also have been factors in shareholders’ cautious reactions to big ticket transactions, WTS said.

Separate Willis Towers Watson research tracking M&A across all sectors reveals similar trends to those in insurance, with acquirers underperforming firms that did not do deals. The consultancy suggests this could indicate that investors are in “risk-off” mode, especially when deal values have been higher than normal.

Based on analysis from WTW and Cass Business School, the Insurance M&A Performance Tracker explores the performance of insurance companies that carry out major acquisitions against their subindustry and regional indexes. Share price performance is measured as the percentage change in share price and is compared with MSCI Indices. The analysis is performance over two time periods: from six months prior to the announcement date to one day post announcement, and from six months prior to the announcement date to six months after the deal closed. Deal data are sourced from Thomson Reuters, and only completed M&A deals with a value of at least US$50 million are included in the research.