S&P's has recently released its conclusions with regard to the M&A perspectives for the insurance industry. Some of the agency's main findings are as following:
- While a successful M&A can benefit the surviving entity, the general consensus is that its track record is not great, and we agree, at least from a credit standpoint.
- In terms of both equity returns and ratings momentum, we have observed a negative bias among acquirers since 2000; for instance, over two-thirds of M&A deals since 2000 failed to improve financial strength enough to lead us to upgrade the buyer.
- On average, one in every eight buyers announced a disposal of the target company or a portion of its book of business within 10 years of the acquisition. In most cases the disposals were driven by underperformance of the target or the financial distress of a seller looking to dispose of noncore assets.
- S&P has taken a fairly neutral view of M&A over the last 15 years, albeit with a bias toward conservatism. A study of the 50 largest transactions involving rated insurers since 2000 shows that nearly two-thirds of ratings on acquirers were affirmed upon announcement of an acquisition, and 22% were put on a negative outlook or CreditWatch (with over half of these eventually downgraded in the subsequent five years). All of the acquirers whose ratings were placed on positive outlook or CreditWatch were eventually upgraded.
- Over the last 15 years, we have cited potential benefits of diversification as a positive rating factor for a proposed deal 41% of the time, strategic or competitive benefits 29% of the time, and improvement in capital 20% of the time. The negative factors we most often warn against are an increase in leverage or weakening of capital (both 15%) and integration and execution risk (44%).
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