Happy New Year to all Actuary-Info readers.
Dutch Insurance Merger
At the end of 2016, two large Dutch insurers - Nationale Nederlanden (NN) and Delta Lloyd (DL) - decided to go ahead with their merger. Formally it's called a take over of DL by NN.
Driven by a declining DL-Solvency-II rate and supported by the concerned Dutch regulator (DNB), DL now finds shelter within NN. Besides the take over price of € 2.5 billion, NN Group faces a decline in solvency ratio from around 250% (pre-merger; Q2 2016) to 185 percent (post-merger, Q3 2016).
A strong merger (background) driver is DL's expectation: "Delta Lloyd's 4Q16 Solvency II ratio is to be adversely affected by the LAC-DT review by DNB, the possible removal of the risk margin benefit of the longevity hedge and adverse longevity developments."
However, keep in mind that 'all' life insurance companies with 'long tails' have a serious (business case) problem. A problem that's not only solvable with money (capital), but necessitates the formulation of a new strategy that goes beyond just "cost control".
As low interest rates will continue and Solvency-II requirements will only increase, more mergers of life companies (with long tail risks) are to be expected.
When is a merger the right solution?
Although a merger often looks like a perfect solution for 'the problem', it not always is.....
Several studies estimate the failure rate of mergers and acquisitions somewhere between 70% and 90% (at least more than 50%).
The most common general merger fallacies and attention points are addressed in a McKinsey presentation:
When a merger or take over is considered, first check the next key-points from a risk perspective :
1. Strategy: Bigger is not always better
It's surprising how inherently correct analyzes always lead to 'bigger' is 'better', while we know that "bigger" contributes to 'too big to fail ',' decreasing cost efficiency ',' less flexibility (less agile) and 'less innovative capacity ' (like Fintech applications).
For successful mergers or take-overs, just applying traditional capital management (and Solvency II rules) just isn't enough. In all cases a well defined checked and supported 'new strategy' (plan) including a strong 'business case', are a first requirement.
Always investigate these (adverse) merger effects and concept new strategy in the due diligence phase of a merger.
2. Increasing complexity effects
Is the change in complexity (IT, communication, products, distribution channels, etc.) measured and addressed in the merger/'take-over? If the complexity increases beyond certain levels, targeted cost reductions may not be met. Often these costs are underestimated.
Always try to measure and address complexity in the due diligence phase of a merger.
3. Consistency
Always check upon the consistency of (financial) analyses. If certain (actuarial) analyses, audits or valuation methods are only applied (one-sided) for the to be acquired company and not for the acquiring company, consistency clearly fails and merger conclusions are probably biased.
Whether it's a "takeover" or 'merger', or how the power in the board is managed, doesn't really matter. Both companies should be compared on the same basis.Always check on consistency in the due diligence phase of a merger.
Finally
Success with risk is on your merger-table in 2017 !!
Links/Sources:
- Bigger is better wine glass
- The Big Idea: The New M&A Playbook
- Mergers and Acquisitions failure rates and perspectives on why they fail
- http://tinyurl.com/NNDLtakeover
- NN Group and Delta Lloyd agree on recommended transaction
- DNB esearch; Bikker; Is there an optimal pension fund size?
- DNB examination into complex IT environments
- 70% of Transformation Programs Fail - McKinsey
- McKinsey: Where mergers go wrong
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