October 22nd, 2013

Capital Stewardship

Posted at 1:00 AM ET

potter_des_bio2ezbiansky_chris_bio2Des Potter, Head of GC Securities,* EMEA and Chris Ezbiansky, Head of M&A Advisory (Americas), GC Securities

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One of the biggest challenges insurers face is deciding how to deploy excess capital to generate a return that meets or exceeds the expectations of shareholders.

Options include maintaining the status quo, returning capital to shareholders and investing in a growth/diversification strategy, either organically or by seeking mergers and acquisitions (M&A) opportunities.

Evaluating the merits of each option and the interplay between them is not an easy assessment, with the best capital stewards employing an all-encompassing strategy.

Maintaining the Status Quo

There has often been reluctance among insurers to return excess capital to shareholders. Excess capital acts as a buffer against unexpected losses. One only needs to look back to the distressed acquisitions or recapitalizations of companies who suffered outsized losses to observe the ramifications of exhausting this capital buffer.

Return to Shareholders

During the last eight years, insurers have been relatively disciplined in returning capital to shareholders when the pricing environment has softened. This was clearly evident during the softening market of 2008, when 13 percent of tangible net asset value (TNAV) globally (1) was returned to shareholders. Conversely, only three percent of TNAV was returned to shareholders when the market hardened in 2006. Given market conditions, we expect the level of capital returned to shareholders to accelerate in 2013.

Invest in Growth or Diversification

A combination of both organic and acquisitive growth is likely to feature in most successful strategies, with decisions made on an opportunity-by-opportunity basis.

Achieving necessary scale - economies of scale lower expense ratios by spreading semi-variable expenses over a larger portfolio of premiums. Equally, capital efficiencies are more obvious for larger entities, with greater diversification credit and better access to financing.

Growing/diversifying by product line - specialty insurance is one of the few market sectors where underwriting and claims management expertise and client/broker relationships are still the predominant differentiators for success.

Growing/ diversifying by territory - with growth opportunities limited in mature markets, many insurers are looking to new states/regions for expansion.

Increasingly, the focus for growth and competiveness in an evolving insurance market is moving towards more M&A activity, particularly strategic bolt-on transactions as the need to adapt business models to achieve scale, geographic diversification and a specialized product suite increases.

GC Securities provides industry leading M&A advice with deep industry experience and a successful track record. The team is committed to advising and assisting clients with their M&A strategies to exploit growth opportunities.

Note:  

(1) Based on analysis of Guy Carpenter’s Global Reinsurance Composite

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*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/NFA/SIPC. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority.

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