Insurers undertaking M&As underperformed their non-acquisitive counterparts last year as megadeals, political instability and strong equity markets impacted carriers’ transactions, according to Willis Towers Watson’s Insurance M&A Performance Tracker.
Acquirers lagged behind the Willis performance index by 6.4 % in the six month period before the deal’s announcement to the six month period after the deal closed, making 2016 the first year since 2010 to see acquirers underperform their subindustry index.
“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,” said Jack Gibson, global M&A lead, 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 shows,” he added.
Until last year, acquiring insurers had outperformed peers by 3-4% since 2008.
Willis suggests that factors impacting the current trend of under-performance include high value and low volume in the M&A market. The average deal value in 2016 was almost double the average value in 2015, mirroring a similar acquisition pattern to 2010.
Gibson commented that the market tends to be nervous “around big, transformational transactions and more comfortable when most activity involves smaller incremental bolt-ons.
“All other things being equal, big transactions are generally deemed to be riskier for the acquiring company.”
A slowdown in activity in the life sector may also have impacted the number of deals, while the property & casualty sector saw less of a drop in M&A activity last year.
Strong equity markets may be another contributor to the weaker performance of acquisitive insurers; “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 U.K.’s Brexit referendum and U.S. presidential elections could also have been factors in shareholders’ cautious reactions to big ticket transactions, said Willis.
Separate Willis Towers Watson research tracking M&A across all sectors reveals similar trends to those in insurance, with acquirers under-performing next to firms that did not do deals, this could mean that investors are avoiding risks, especially in an environment where deal values have been higher than normal.
