Talk about setting the tone for mergers & acquisitions in the P&C market this year.

In a notable move away from financial risks and pivoting toward insurance risks, AXA announced that it is acquiring XL Group Ltd. in a sizable $15.3 billion cash transaction. The deal seizes on a strategic opportunity for AXA to shift its business profile from mostly life & retirement business to predominantly P&C business, and positions XL Group as the No. 1 global P&C commercial-lines insurer based on gross written premiums.

Once the acquisition is completed, AXA and XL Group's combined P&C commercial lines operations will enjoy a solid position in the large and upper mid-market space, including in specialty lines and reinsurance. The deal also strengthens AXA's presence in the small and medium-size business segment.

So much about mergers & acquisitions in the P&C space is about achieving scale, and adding strength and talent the buyer does not yet possess. And to hear Boris Lukan tell it, for several key reasons the weather is ideal for multiple M&A deals to take place this year. (For Deloitte's in-depth look, check out its 2018 Insurance M&A Outlook report.)

Lukan leads the U.S. Insurance M&A and Restructuring practice for Deloitte Consulting; now in his 25th year with Deloitte, he is one of the firm's most experienced insurance consultants, focusing on post-merger integration, M&A strategy, commercial & operational due diligence, and enterprise-wide cost reduction & restructuring.

Deal volume in 2018, he said, is expected to be largely consistent with the increase in M&A seen in 2016 and 2017 (with values raging between $5 billion and $15 billion, on average) as companies look to utilize M&A to achieve strategic objectives.

“This kind of deal is not new to the world, to be sure, but what is new is the notable uptick in transactions,” Lukan told me. “Our observation is that this is a new development.”

Environmental conditions, he said, are ripe to continue the insurance M&A activity of 2017's second half. Investor and consumer confidence is high; the U.S. and global economies are improving; U.S. tax reform was signed into law; interest rates are moving in the right direction; organic growth remains elusive; and available capital remains at an all-time high.

The fundamental driver behind M&A in the P&C business, he said, remains strategic acquisitions. “Buyers still buy for strategic reasons, as opposed to financial engineering,” he said. But that's hardly the only reason.

“In the last 18 months, we've seen multiple CEO changes in the industry,” Lukan noted. “And not smaller, fringe companies. We're talking brand-name global insurers, global or regional CEOs.” Changes at the top at that level of frequency can be a stimulant for M&A, he added, that correlates with a strategic shift in corporate strategy, including the divestiture of non-core businesses.

“This degree of change doesn't happen every year,” he added. “Recently, it's been quite substantial. Because some of these companies have M&A capability, that makes it a driver.”

Given the near-record number of severe natural catastrophes in 2017, one could ask whether that would translate into the potential for rate increases – and if it did, would they be robust enough to translate into real growth, and an impediment to M&A? Lukan says no.

“Rate increases are isolated, and are not going to be sufficient enough in the aggregate to be a growth driver this year,” he said. “They're not going to be substituting much for organic growth.” Thus, companies look elsewhere in order to achieve that growth.

Lukan noted that company valuations in the P&C industry in the last decade are near 10-year highs. “They are fully valued,” he said. “They're pretty expensive right now, on a historical basis. That makes it harder for buyers to bring a price that would be deemed sufficient to the seller. With P&C companies trading that high they're set up as a headwind for M&A, especially within the P&C sector.”

InsurTech is another factor, and it continues to garner considerable industry attention given the strategic importance of technology investments. As detailed in Deloitte's “The State of the Deal: M&A Trends for 2018” report, acquiring technology assets ranks No. 1 as a strategic driver of M&A activity.

Most companies, Lukan explained, are making relatively small investments (in the $5 million to $20 million range) in developing their own in-house solutions. In a lot of cases, it's a better bet to find something external that a company can buy to better power its operations.

“There's a ton of attention around [InsurTech], due to its strategic significance,” he said. “What we're anticipating is that this going to begin to involve to more outright acquisitions. That will accelerate. Traditional insurers may need help in becoming more digitally enabled or supplementing their in-house data and analytic skill sets. InsurTechs will refine their value proposition in the capabilities they've built or in the teams they've assembled. In those cases, the solution is so unique and so valuable that the insurer doesn't want to be a customer; they want to own it.”

Lukan's advice for those contemplating M&A:

* Examine your existing portfolio * Consider divesting assets that may no longer be core * Evaluate acquisitions or investments that will improve positioning in core markets * Perhaps most important, he emphasized, thorough due diligence and effective planning for integration should be the focus at the beginning of the process, not after the transaction closes.

The 'Human Factor'

Indeed, if there's one thing that seems to get significantly less attention in M&A transactions, it's how those acquisitions are managed, post-buy. Remember that companies are staffed with human beings, who more often than not quickly grow concerned for their jobs once they know new talent has been brought into the fold – on either side of the buyer's desk. The process of establishing a new culture at the entity being acquired is the responsibility of the buyer, and that task has to be managed mindfully and with as much transparency as possible.

“Having successfully completed over 90 acquisitions during my 10 years here, we've recognized how important the post-close integration efforts are to the long term success of the deal,” says Nahua Maunakea, Executive Director of Global Risk Management for global information company IHS Markit Ltd. Its services include efforts supporting business development, including mergers & acquisitions, due diligence and integration.

“The quicker you're able to get the new members to become part of the fabric of the organization, and have them understand and embrace the culture (or in some cases, you adopting to incorporate aspects of theirs), the greater the chances the learning curve will be shortened,” he adds.

“The lessons we learned and best practices we'd developed were put to the test when we merged with a company, and all of a sudden the shoe was on the other foot, so to speak,” he continues. “We were now the ones with the questions: What does this deal mean? Will I still have a job? What will the job be like in the 'new' company? What will our culture be? Will I fit in? Thank goodness the management team and others responsible for the integration have done a very good job of communicating the goals and key steps of the process, providing regular updates, making themselves available for questions from us, and encouraging feedback and dialogue.”

Special Reports /

As AXA acquires XL Group, a look ahead at P&C M&A deals to come in 2018

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