Shelved, for now

Shelved, for now

The appetite for mergers and acquisitions has evaporated as the pandemic sends the global economy into a tailspin. But for some, adversity also brings opportunities

By Bernice Han

On March 9 Aon finally made its move, announcing a near $US30 billion all-stock deal to acquire smaller rival Willis Towers Watson. The union, if approved by shareholders and regulators, will create the world’s largest insurance broker by value of about $US80 billion.

Not only is the deal the insurance industry’s largest ever, besting the $US28.3 billion that Ace splashed out in 2015 for Chubb, it is also the biggest merger and acquisition (M&A) of any kind globally so far this year.

After abruptly walking away from a merger deal with Willis Towers Watson last year, Aon decided the timing was right. But the powers behind the blockbuster deal might have hesitated again if they had foreseen what was coming within days – financial markets going into meltdown, spooked by grave fears that the COVID-19 pandemic may drag the global economy into its worst recession in decades.

Aon shares fell 16% on the day the deal was announced, although whether the merger had much to do with it is impossible to gauge. Similar sharp falls were taking place on Wall Street and other key financial markets. The bellwether Dow Jones Industrials index plummeted 2000 points on that day, and oil prices tanked 20%.

Since the Aon announcement, investor mood has turned considerably darker, and by extension so has the sentiment for any M&A deal-making. The immediate focus for insurers, like their peers in other industries, will be on the rapidly declining health of the global economy, the result of lockdown measures imposed in many countries to try to slow the spread of the virus.

Scott Guse, KPMG’s Brisbane-based Partner for Audit, Assurance and Risk Consulting, tells Insurance News that the M&A appetite of companies here and around the world “is off the table for the near term while we go through this pandemic. Liquidity and cash are kings these days.”

KPMG has spoken with two dozen of its M&A insurance clients globally, and it appears the industry is taking a cautious attitude while the economy remains in a virus-induced coma.

“Most expect M&A execution processes will likely slow down while resources are working remotely and management teams are more focused on internal crisis management,” Mr Guse says. “Potential ‘new deal’ processes are on hold.

“Existing M&A processes are still trying to move forward. Cross-border deals will take longer than ever to execute given the uncertainty as geopolitical recession accelerates.”

Analysts from rival consultancy EY hold similar assessments. They say major M&A activities are looking very remote at this stage as the industry devotes its attention to countering the economic slump.

“At this point, very large-scale acquisitions would be less likely in these circumstances,” Tim Coyne, EY’s Oceania Transaction Advisory Services Leader and Financial Services Partner, tells Insurance News. “Cash is absolutely the king at the moment.

“The primary responsibility would be on the immediate crisis.”

No doubt many crisis management meetings have been held by now to discuss ways to ride through the economic crisis. It is anybody’s guess as to how long it will take the global economy to recover this time, and there are already fearful whispers of a repeat of the 1930s Great Depression.

“As an institution, one would be looking at ‘how to recover’ and if that requires really sitting on cash balances essentially to preserve the institution, you would think that the board and executives would have that as a primary focus,” Mr Coyne says.

“We’re in an unknown environment. Certainly, talking with clients, they are dealing with the immediate issues.”

But it will not be total silence. As in any business downturns, there will still be shrewd investors out on the prowl, scouting for good buys. And in the insurance industry, it is in the broking and insurtech spaces where M&As are more likely to occur.

“The fintech companies will be the ones that really suffer in this environment. They don’t have the capital and they don’t have the financial viability.”

The likes of Steadfast and AUB, the two broking giants that have been very active on the M&A trail, will probably be presented with too-good-to-let-go opportunities. Smaller brokerages and underwriting agencies already sitting on wafer-thin reserves before the public health crisis broke out could be in the market, and chances are they could be acquired at relatively bargain prices.

“I can see potential upswing in acquisitions occurring in the smaller broker space,” KPMG’s Mr Guse says. “The smaller ones that are owned by individuals rather than large corporations may have cashflow issues, and they may then become distressed. Therefore opportunities may present themselves.

“That is where you make a lot of money in this sort of market – buying distressed assets at the bottom of the cycle and turning them around.”

The same goes for insurtechs and the broader fintech industry. Many of these promising digital start-ups have yet to produce consistent profits, and some rely heavily on capital raisings to sustain their business models. In the financial environment that is now rapidly developing, it may be tough to convince investors to part with their capital.

“Insurance companies acquiring smaller fintech firms are where I see other opportunities emerging,” Mr Guse says. “The fintech companies will be the ones that really suffer in this environment. They don’t have the capital and they don’t have the financial viability. I can actually see an increase in distressed acquisitions in that sort of marketplace.”

So what was the outlook for insurance M&As globally before the initial cases of coronavirus were confirmed by provincial officials in Wuhan?

About 50% of insurance executives surveyed by EY said at the start of the year that they would actively pursue M&A opportunities this year. They were keen on assets that would complement their existing business models, speed up their digital transformations or open new routes to customers.

Three-quarters of the executives were expecting an increase in cross-border M&As, driven by technology and digitalisation.

And about 65% thought there could be an increase in competition for assets, while 79% were bracing for a “more hostile bidding environment”.

A separate report by Deloitte predicted insurance M&A volume and value levels this year would remain similar to 2019. Last year the industry saw 38 property and casualty insurer deals, with an average value of $US448 million. Tokio Marine Holdings’ $US3.1 billion purchase of US high net worth insurer Privilege Underwriters was the top deal by value.

“Projected economic, interest rate, and financial market uncertainty, along with a presidential election [in the US], are among the headwinds that may give pause to insurance companies contemplating M&A in 2020,” Deloitte said.

“Despite these potential challenges, companies continue to view alliances, investments, and acquisitions as attractive options when market factors make organic growth more difficult.”

Not any more.