For only the second time this decade, insurers undertaking an acquisition underperformed their sub-industry index, according to the Willis Towers Watson Insurance M&A Performance Tracker.
Key Findings
Insurance firms that carried out a significant acquisition in 2016 were likely to underperform their sub-industry index.
This is a reversal of the pattern of the previous eight years, when acquirers were likely to outperform their sub-industry index.
A high-value, low-volume M&A environment, political volatility and a strong equity market contributed to the weaker performance of acquisitive insurers in 2016.
The research, based on analysis of deals with a value of more than US$50m conducted in the insurance sector, showed that acquirers lagged the index by 6.4 percentage points in the period six months before announcement to the point six months after the deal closed. The last time acquirers underperformed their sub-index was in 2010.
"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 Fergal O'Shea, EMEA Life Insurance M&A Leader at Willis Towers Watson. "Since 2008, insurance acquirers have outperformed the market, a trend that has become even more pronounced since 2012. M&A is still beneficial and it will be interesting to see what the data for 2017 shows."
From 2008 onwards, insurers that carried out an acquisition outperformed peers by 3 percentage points. Since 2012, acquirers have traded 4.4 percentage points above their sub-industry index.
According to Willis Towers Watson, there are a number of factors that account for the recent underperformance. First, the general trend for high value and low volume in the M&A market. There were only 19 insurance deals tracked in 2016, and average deal value was almost double the average value in 2015. These figures mirror those from 2010, the last year in which acquisitive insurers underperformed.
“The market tends to be nervous around big, transformational transactions and more comfortable when most activity involves smaller incremental bolt-ons," says Brendan McMaster, Senior Consultant at Willis Towers Watson. "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. "Equity markets are doing well, so firms don't need to do acquisitions as shareholders are rewarding those focusing on organic growth," said Fergal O'Shea.
Geopolitical uncertainty and the surprise poll results in the UK's Brexit referendum and US Presidential elections could also have been factors in shareholders' cautious reactions to big ticket transactions.
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.
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