Capital optimisation through M&A

Capital optimisation through M&A

Capital optimisation through M&A 1040 530 Qasim Akbar

SCOR’s Chairman and CEO Denis Kessler posed the question best: “Will the refragmentation of the world affect insurance and reinsurance?”

As European (re)insurers continue coming to terms with Solvency II, the world around them hasn’t stopped throwing up challenges. The race to succeed in a highly volatile environment has intensified and value creation has never been so important for growth and success, requiring a comprehensive understanding of capital management.

Globally, firms are seeing similar changes through the imposition of commensurate responsibility, forcing (re)insurers to look again at their asset-liability structures. This has propelled capital optimisation to the top of boardroom agendas and for some players, has brought the strategic importance of M&A into the frame.

The demands of efficient capital deployment have urged (re)insurers to reconsider how they allocate their available assets. Some have opted to acquire competitors or similar businesses in different market sectors whilst others have chosen to sell. The best divestures sell at a premium, which helps preserve their identity and their continued generation of relatively uncorrelated returns. Either way, the importance of understanding all available options and mechanisms, such as M&A, is paramount for effective capital management and enhancing results for all stakeholders.

Larger players such as AXA have paved the way. Their purchase of XL Group demonstrates a progressive commercial awareness which led to capital synergies, delivering a 30% drop in the target’s Solvency Capital Requirement, and by 2020 a diversification benefit to AXA Group’s Solvency Ratio of up to ten points. From XL’s perspective, this was a smart move as they benefit from access to a wider capital base. Win – Win!

M&A has also been utilised to facilitate geographical reach, such as China Re’s purchase of the Chaucer Group, which will add diversification to a sophisticated portfolio. And investment fund Apollo Global gained scale and expertise through its cash acquisition of Aspen Re.

Successful companies continuously assess their investment strategy, which includes considering opportunities that target aligned asset portfolios. Markel’s recent purchase of Nephila, the ILS specialist, looks set to give them a market-leading position in this part of the business, especially together with its acquired fronting specialist State National.

Arguably, the real gem for an acquisition comes through the people and importantly attaining a data-rich firm. Buyers that can apply leading-edge analytics to a new subsidiary/division with a huge warehouse of data may improve pricing across the board and facilitate better risk selection for capital optimisation. AXIS, an innovator in the application of big data analytics, acquisition of Lloyd’s platform Novae surely falls into this category.

Achieving great capital results through M&A requires strategic planning and an acute awareness of the goals of such deal-making. Targets should promise strong future earnings and with sufficient forethought M&A can yield a much-desired competitive advantage.

The outcome of the deals discussed above will come clear in due course but the immediate evidence suggests that informed buyers have bought strong companies, which should allow all to enjoy a more rewarding future.

Strong commercial awareness combined with analytics are key to determining the likelihood that a specific M&A deal will deliver on capital optimisation, and Capsicum Re has the product ingenuity, market insight alongside analytical skills and advanced tools to make this assessment. Our team is made up of entrepreneurs, business owners and experts who combine real-world insight with advanced modelling results to provide truly informed insight.