{{indexingdisabled}} Best's Review - November 2023 Edition - Risk Adviser and Midsize Businesses Risks

Contents

  1. Cover
  2. Editors Desk: Generative AI and AI Revolution
  3. Contents: AI Revolution and Florida Property
  4. Bests Calendar and Executive Changes
  5. Executive Changes and Chief Executive Officer Appointments
  6. Executive Changes and Web Traffic
  7. Masthead Forestay
  8. At Large and M&A Motivations
  9. Risk Adviser and Midsize Businesses Risks
  10. Issues and Answers: Workers’ Compensation and Florida Market
  11. Issues and Answers: Workers’ Compensation and Specialization
  12. Issues and Answers: Workers’ Comp and Workplace Dynamics
  13. Issues and Answers: Florida Market and Homeowners Insurance
  14. Life Insurtechs: Agent Partnerships and Legacy Carriers
  15. Life Insurtechs: Investments and Partnerships and Acquisitions
  16. AI Revolution: Insurers and Insureds and Insurance Workforce
  17. AI Revolution: Artificial Intelligence and Insurance Organizations
  18. AI Revolution: Artificial Intelligence and Insurance Workforce
  19. AI Revolution: Underwriting and Claims Management
  20. AI Revolution: Insurance Prospects and Policyholders
  21. AI Revolution: Bias and Data Privacy and Regulation
  22. Florida Property: Homeowners Market and New Insurers
  23. Florida Property: Tough Market and Growth
  24. Bests Rankings: US Homeowners Multiperil and Direct Premiums Written
  25. Bank Failures and Society of Actuaries
  26. Bests Rankings: Workers Comp and Investment Returns
  27. Bests Rankings Asset Distribution and What AM Best Says
  28. What AM Best Says and US Homeowners Market Outlook
  29. Loss Control: Cyber Hygiene and General Practitioners
  30. Insurance Media and Awkward Insurance Podcast
  31. State Rate Filings: California Regulators and Homeowners Multiperil
  32. State Rate Filings and California Homeowners Multiperil
  33. Book Store and Corporate Changes
  34. Trending News and Trending Research
  35. AM Best Webinars and AM Best TV Audio
  36. Rating Actions: Americas Life/Health and Americas Property/Casualty
  37. Rating Actions and Americas Property/Casualty
  38. Rating Actions: Europe Middle East Africa and Holding Companies
  39. Rating Actions: Financial Strength Ratings and Issuer Credit Ratings
  40. Preferred Publisher Program and Global News Roundup
  41. Insurance Professional Resources and Masthead Backstay
  42. Last Word: Homeowners Multiperil and Direct Combined Ratios
  43. Back Cover
 
14-15 14-15
M&A Motivations:
Strategies for
Success, Value
Creation and
Diversification
12
By
Bill Pieroni
The insurance industry has had
significant growth in the size of M&A
transactions, but do the long-term
results support this acquisition
strategy?
C
arriers and brokers have consistently
pursued mergers and acquisitions
in order to grow and diversify their
business. In the past decade, the industry
has witnessed significant growth in the
size of M&A transactions.
While it is a prevalent strategy, does it support
consistent value creation for carriers? Additionally,
do the rationales and motivations for acquirers
impact long-term results? ACORD recently
examined nearly 15,000 M&A transactions
over the last 10 years to answer these and other
questions.
Carrier Strategies & Motivations
Though there are many reasons carriers might
pursue M&A deals, ACORD’s research identified
four key sources of buyer motivation across all lines
of business.
•
Core expansion:
These buyers sought to
increase their share across areas in which they
Best’s Review
columnist
Bill Pieroni
is president
and CEO of ACORD. He can be reached at
bestreviewcomment@ambest.com.
BEST’S REVIEW
•
NOVEMBER 
already execute—their current line of business,
customer segment, or geography. This was the most
common acquisition motivation among property
and casualty and composite insurers.
•
Scale and scope:
These buyers endeavored
to take advantage of amortized fixed costs and
improve resource access by growing their size and/
or reach. This represented the most common
motivation among life insurers and reinsurers.
•
Capability acquisition:
These insurers
pursued the acquisition of companies possessing
tools or resources for optimizing the risk, cost and
time associated with developing key capabilities—
technological or otherwise.
•
Diversification:
These insurers were intent
on optimizing their portfolios by investing in new
revenue and earning sources. This produced widely
divergent outcomes in different lines of business.
At Large
mailto:bestreviewcomment@ambest.com
Outcomes & Value Creation
Interestingly, the outcomes of these deals were
considerably different across lines of business, even
if the carriers were motivated by the same central
principles.
In aggregate, P&C carriers experienced higher-
than-average returns after M&A transactions in
all four motivation categories—in fact, 70% of
the P&C deals studied created value over the
course of the 10-year analysis period. However,
life insurers faced difficulties regardless of the
rationale behind the deal, with just 36% of all
M&A transactions in this segment creating value.
Reinsurers experienced mixed results, creating
value in just half of acquisitions overall, with high
performance limited mostly to deals motivated by
core expansion.
Diversification
Interestingly, diversification was by far the most
successful motive among P&C insurers—driving
average TSR appreciation more than twice as high
as the other rationales—but less successful in other
lines of business. For life insurers, diversification-
motivated acquisitions destroyed more than four
times as much value as other transactions.
Clearly, there is no one-size-fits-all option in
M&A strategy—in fact, for some, the best decision
may be to avoid these deals altogether. Those who
seek to create value post-M&A must first assess
their unique set of circumstances—the lines of
business in which they operate, their motivating
factors, and more—in order to make an informed
decision that will enable them to thrive in the long
term.
BEST’S REVIEW
•
NOVEMBER 
13
Midsize
Businesses Face
Full-Size Risks
14
By
Alex Wells
Middle market companies must
navigate many of the same
challenges as larger corporations,
but often without adequate
resources to address them.
T
he 200,000 midsize businesses in the
United States generate $10 trillion in
combined revenue and almost a third of
the private sector gross domestic product,
according to the National Center for the
Middle Market. Their greatest strength is often their
flat organizational structure and agility, which allows
them to quickly respond to customer needs and
marketplace opportunities.
They are essential businesses that form the
backbone of the U.S. economy and are exposed to
the host of economic, legal, social, regulatory and
natural catastrophe risks we hear so much about
today.
Midsize businesses and large enterprises have
distinct characteristics that can lead to differences in
how they experience and respond to various risks.
Some reasons why midsize businesses might feel the
impacts of risks differently include:
•
Resource constraints:
Midsize businesses often
have fewer specialized resources dedicated to unique
operational risks compared to large enterprises.
•
Focused geography:
Large enterprises are more
likely to have operations spread across different
regions or even countries, providing diversification
that reduces the impact of localized risks.
•
Specialized or limited supply chains:
Large
Best’s Review
contributor
Alex Wells
is head of U.S.
Middle Market, Zurich North America. He can be
reached at
alex.wells@zurichna.com.
BEST’S REVIEW
•
NOVEMBER 
enterprises are better able to diversify their vendor
partners while maintaining economies of scale.
•
Assets that are less liquid:
Midsize businesses
frequently operate with fewer cash reserves and,
therefore, have less time after a disruption to recover
before experiencing an impact to their business.
The unique risk profiles of midsize businesses—
not large enough to have specialized risk
management, legal and operational teams, but
far too complex for standardized off-the-shelf
solutions—require insurers to develop equally
unique approaches to help manage their risks.
One way that insurers can do this is to focus on
specific industries—technology, financial institutions,
professional services, real estate, manufacturing,
etc.—and develop in-house expertise that understands
the unique pain points of each company within
those industries. This leads to efficient solutions that
Risk Adviser
mailto:alex.wells@zurichna.com
are still customized to a business’s unique attributes,
including industry and geography.
The Impact of ‘Nuclear Verdicts’ on Midsize
Companies
The specific concerns of midsize companies will
vary depending on the industry. But a common, and
growing, concern that is threaded throughout nearly
all industries is the rise in exceptionally high jury
awards.
Also known as “nuclear verdicts,” they are
becoming more common and are being driven,
in part, by aggressive plaintiff attorneys who are
increasingly financing litigation through a new
business model in which third-party investor groups
provide capital to law firms involved in personal
injury and liability litigation in return for some
financial recovery once the lawsuits are resolved.
Combined with other societal trends, the use of
litigation financing drives what is commonly referred
to as “social inflation.” Some of these societal trends
hinge on the value of money and plaintiff attorneys’
ability to convince a jury that someone who was
wronged by a corporation is due a hefty payout.
All the factors that make midsize businesses more
vulnerable to risks than their larger counterparts
come into play here, including limited resources
to defend against lawsuits and limited finances to
absorb a loss. Large verdicts will result in massive
payouts that likely far exceed a midsize company’s
insurance coverage.
This reality may prompt insurers to think
twice before providing coverage or seek rate hikes,
particularly for lines of coverage susceptible to
nuclear verdicts, including commercial auto, medical
malpractice, and directors and officers liability.
BEST’S REVIEW
•
NOVEMBER 
15
A

RESPECTED

AUTHORITY

ON
THE INSURANCE INDUSTRY
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Special Advertising Section
I
SSUES &
A
NSWERS:

• Workers’

Compensation

• Florida Market

Industry experts discuss the benefits of specialization in workers’ compensation, the
market’s challenges and the outlook for homeowners insurance in Florida.
Interviewed Inside:
Dan Landers
A.I.M.
Mutual Insurance Cos.
Dale Hoppe
Nationwide Excess & Surplus/Specialty
Arthur Randolph
Pinnacle Actuarial Resources
View past Issues & Answers sections at
https://bestsreview.ambest.com/issuesanswersarchive.html
https://bestsreview.ambest.com/issuesanswersarchive.html
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