Getting strategic about inorganic growth: Insurance CEOs speak

Insurance CEO’s get strategic about inorganic growth

Insurance CEOs are becoming much more strategic about their inorganic investments. Almost half – 45 percent – say they expect to undertake a merger with another firm in the next 3 years.

Chairman of KPMG New South Wales and National Sector Leader, Insurance

KPMG Australia


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While the pace of deal making in the insurance sector may have slowed relatively, compared to the prior year, our survey of more than 100 insurance CEOs indicates that appetite for inorganic growth continues to remain high.

Almost half of all insurance CEOs – 45 percent – say they expect to undertake a merger with another firm in the next 3 years. Around four-in-ten say they will either buy or sell a business, asset or capability set from (or to) another firm. Half of the CEOs we surveyed believe that inorganic growth will be key to achieving their growth strategies.

A refocused view of M&A

Why, then, has this appetite not translated into a flurry of deal making and consolidation across the sector? In large part, it is because insurance CEOs have become much more strategic about their investments.

Yes – although many insurers expect to conduct traditional mergers and acquisitions over the next 3 years – our data demonstrates that they are equally (if not slightly more) keen to create partnerships and joint ventures with other firms to innovate and achieve their strategic objectives. Insurance CEOs increasingly expect to collaborate and partner with/invest in other firms (including technology firms outside the industry) to remain competitive and innovative. CEOs are also very clear that these collaborative efforts could potentially drive the majority of shareholder value over the next 3 years.

Executives are also becoming much more focused on creating stronger alignment between their M&A activity and their business strategy. They are thinking carefully about how their businesses will win in their markets and they are looking for acquisitions and partnerships that could help them enhance their competitive advantages. They are reshaping their portfolio of businesses and assets, centers of operational excellence and markets to meet future growth opportunities. And they are thinking carefully about what capabilities and skills they will need in order to innovate and win in the future.

Strategy-driven transactions

The fact that insurance CEOs are now starting to refocus their M&A initiatives through a more strategic lens is clearly good news for the industry and for stakeholders and investors. But we believe this is only the beginning of a much more focused shift towards strategy-driven transactions within the insurance sector that will ultimately define the competitive landscape going forward.

Indeed, leading insurance companies are already taking purposeful and fundamental steps to improve the alignment between their M&A activity and their business strategy. This starts with formulating a very clear understanding of what makes your business unique and competitive in the market and then using that information to start to assess the real value and strategic fit of potential acquisition targets.

Say, for example, your business is a market-leader for superior customer service. Target assets or businesses that could help brandish those credentials or improve those capabilities should therefore be of higher value to you than they would be to a competitor who competes based solely on low prices. With this information in hand, insurers should be able to make more value-based investment decisions that ultimately lead to achieving their long-term strategic growth objectives.

Applying the strategic lens

Leading insurers are also starting to take a much more holistic approach to evaluating potential acquisition and partnership opportunities. They now look beyond the traditional financial due diligence aspects of evaluating the deal to also consider the strategic fit of the target’s business model and the potential risks associated with integrating the target’s operating model.

In most cases, this means extending and expanding the due diligence process at both ends: at the top end by including a more strategic analysis of the target’s medium-term strategy; and at the back end where insurers are starting to conduct more strategic integration risk assessments of the target’s businesses, its people, processes, and systems that they are hoping to acquire and integrate into their operating model.

Creating alignment

In many cases, this may require closer alignment of the existing M&A function with the Strategy function and Corporate Development function to enable strategy driven transaction identification and evaluation for long-term growth. It will certainly require tighter screening and more frequent communication among the functions for better coordinated planning and execution of transactions.

It may also require a reassessment of the objectives and priorities of the M&A function to focus more on the expected and actual value that transactions deliver rather than simply on the successful execution and closing of transactions.

When we work with insurers to improve the value of their inorganic growth strategies, we focus on what we call the ‘Nine Levers of Value’. The process allows executives to not only drive improved alignment between strategy and capability, but also to achieve a more holistic view of the relationships between each ‘lever’. By focusing on the levers of value to evaluate a potential target’s business model and creating improved alignment with the potential target’s operating model, insurers could have a much clearer view of how value is created for their businesses by adopting a strategy driven transactions perspective.

Seeking long-term growth

Every insurer is looking for the ‘next’ big growth opportunity. And in today’s slow-economic growth and low-interest rate environment, it is clear that inorganic growth (via mergers, acquisitions, partnerships and alliance transactions) will continue to be a critical component of any insurer’s long term growth strategy.

We believe that as the insurance sector increasingly plans and executes its deal activity using a strategy-driven transactions lens that focuses on the ‘Nine Levers of Value’ for identifying, evaluating, and integrating potential acquisition targets, and innovative partnerships and alliances – the insurance industry could only emerge much stronger as a result.

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