The Covid-19 pandemic has created a plethora of issues and uncertainty for people and businesses worldwide. Here, we investigate what the post-Covid reality may be for M&A transactions within the Insurance industry, as well as a look forward into a murky future.
Broadly speaking, the insurance industry has produced a robust response to the onset of the Covid-19 pandemic, efficiently transitioning to a remote working environment whilst maintaining BAU activities. Indeed, many firms have already begun a phased ‘return to work’ plan, whilst Lloyd’s intends to partially reopen its underwriting room on the 1st September.
Against a turbulent financial backdrop, business continuity became the most essential short-term goal for insurance companies, meaning that any large-scale M&A projects or plans were to be put on hold or abandoned as seen with the Covéa and PartnerRe deal. M&A transactions in process at the time of the pandemic found short term progress extremely challenging. Broad financial uncertainty resulted in regular equity market swings, meaning that assets became difficult to value. Additionally, for those deals on the brink of closing, potential delays in the regulatory approval process along with material changes in the accuracy of “brought down” materials and representations, were likely to have exacerbated closing risk. Alongside this, question marks surround the future of consumer behaviours and in turn, the recovery period of the economy. With much of the developed world flirting with a return to at least partial lockdown, and the search for a vaccine yet to yield a silver bullet, continued uncertainty remains. The macro environment, combined with new deal specific scrutiny, enforced by Covid-19, has resulted in a reduction in M&A activity with deals also taking much longer(1) . In the short term, this trend is set to continue, with legal evaluation of existing documentation and diligence processes for instance a major obstacle to be addressed in the post Covid environment.
It will only become apparent once the pandemic has played out how robust the reserves held by different (re)insurers, and how the potential litigation might impacts the solvency of insurers, all of which adds to the uncertainty.
The medium to longer term is likely to tell a different story however. The pandemic will gradually retreat and as the drivers of M&A pre-Covid resurface, corporations will be looking to expand and diversify their portfolios again. Studies have shown that M&A activity that is engaged upon within a period of downturn can provide longer term value to the acquirer than when engaged upon within the peak of the market(2). In addition, the insurance industry is known to possess ‘strong fundamentals with a relatively low risk profile’(3), a feature unlikely to be perturbed by the Covid-19 pandemic, ensuring that the industry will continue to draw interest from private equity investors in the future. Further, cash rich investors may look to the life insurance market, specifically legacy/back book transactions as a means of exploiting other firms needs to rid themselves of businesses they no longer want or see as strategically relevant(4). In short, not only are there opportunities now for insurance M&A, but the sector may become a more attractive prospect for such activity in the post Covid-19 world.
The nature of transactions will undoubtedly change in the future, with a number of factors now being looked further into detail than before. Flexibility of the workforce along with operational resilience are now more important than ever, as we’ve seen throughout this pandemic. Additionally, the ability to innovate will be essential when looking to acquire, ensuring a firm is able to adapt to a given scenario and not crumble under unexpected pressure. We will therefore see increased due diligence on target entities to identify whether the transaction could pose any additional threat to the overall operational ability of the firm, as learnt through the difficulties faced through the pandemic.
It is still yet too early to tell whether the Covid-19 pandemic will pose any long lasting threat to any M&A deals in the making. However, we expect to see activity accelerating as the crisis slowly diminishes with firms looking to consolidate and strengthen their positions in the financial markets, taking advantage of those who have disproportionately suffered due to the crisis, using M&A as a strategic play to propel firms back on top.
- Willis Towers Watson’s Quarterly Deal Performance Monitor (QDPM) report