Share prices for insurers who acquire other companies outperform industry average in months following deal completion

Share prices for publicly-traded insurance companies who acquire other firms outperform the industry average, according to a new analysis from Towers Watson and Cass Business School.

The analysis looked at major acquisitions completed by stock market-listed insurance companies worldwide between January 2008 and December 2013.

Among those, acquirers share prices typically outperformed the industry average by an excess 4.2 percentage points in the months before and after the transaction was completed, Towers Watson said.

The short-term picture is similar for life, property and casualty and composite businesses, the firm noted.

However, two years after deal completion, there was little or no average valuation premium compared with insurance stocks overall, according to the analysis.

“These figures suggest that the global investor community clearly sees a rationale for M&A activity across much of the insurance sector but still has to be persuaded on the track record of some companies in delivering their projected post-deal financial results,” Andy Staudt, P&C insurance M&A leader for the EMEA region at Towers Watson commented in a press release.

Deals completed in the acquirer’s own country showed the most positive share price outcomes, Towers Watson said. Those transactions have typically resulted in an excess return to investors of 8.3 percentage points in the short-term and 7.9 percentage points in the two-year timeframe after the deal is completed.

“This supports the idea that it’s easier to generate returns in a market you understand well,” Staudt said. “It also corroborates the finding from our recent survey of over 250 global insurers’ M&A intentions of a ‘home bias’ when looking at the relative attractiveness of various markets.”

However, activity across regions also brought positive returns.

Overall, the deals had an average completion time of approximately 116 days compared with approximately 70 days for other industries, Towers Watson also noted.

“The drop-off in share price performance two years after deal completion and the time taken to conclude transactions support the viewpoint that evaluating and making a success of acquisitions in insurance, where the actual costs of production are not known until many years after the sale of a policy, is possibly not as straightforward as acquiring a company that manufactures widgets,” Staudt said.

“Acquisitions have been and will continue to be a successful growth strategy for a number of insurance companies, but there is still very much the need to go into a deal with a full understanding of factors such as the longer-term strategic fit of the target, variations in competitive and regulatory environments, retaining talent and systems and technology requirements if the desired financial returns are to be achieved.”