The larger the merger and acquisition deal is, the less likely it will create long-term value, a new study has revealed.

A first-of-its-kind study by ACORD, the standards-setting body for the global insurance industry, screened an estimated 15,000 transactions, focusing on publicly disclosed transactions valued at $1 billion or greater.

The deals analyzed in-depth represented a total value of nearly $290 billion, accounting for more than one-third of the value of all carrier M&A transactions worldwide.

“Carrier Mergers & Acquisitions: Major Transaction Value Analysis” examined the largest M&A transactions over the last decade by insurers in property/casualty, life and reinsurance, to understand the motivations behind M&A activity, long-term value creation, and barriers and enablers in achieving success.

Transaction size

ACORD assessed the M&A transactions by deal size and shareholder value at risk (SVAR) to understand how these factors contributed to long-term outcomes.

Dividing the transactions into quartiles by deal size revealed a “Goldilocks principle” at work, according to the standards setting agency.

Midsize deals performed better than the largest or smallest transactions in the long run.

The second-smallest quartile — comprised of transactions averaging about $1.4 billion — was the only cohort that outperformed the relevant index over the period studied.

The larger and smaller quartiles both underperformed the market, the ACORD study found.

“While the largest deals may garner headlines and high hopes, they typically are not the most likely ones to create value in the long term. A transaction that is too large may simply be too big for the acquirer to successfully digest,” said Bill Pieroni, president and CEO of ACORD. “One that is too small, on the other hand, may not draw sufficient attention and oversight. Insurers must carefully consider their ability to manage existing operations without disruption, while effectively integrating the benefits they hoped to achieve by the transaction.”

Segmenting the M&A transactions by SVAR showed similar results, revealing a “sweet spot” for long-term value creation when moderate amounts of shareholder value were at risk.

Buyer motivations

Four major buyer motivations for carriers were identified through the study:

Scale and Scope: Amortize fixed costs and improve resource access by increasing absolute size, and/or expanding scope across strategic and tactical dimensions.
Core Expansion: Increase share across areas in which the insurer already executes, such as products, geographies, channels, and customer segments.
Capability Acquisition: Optimize the risk, cost, and time associated with developing new or enhanced internal capabilities.
Diversification: Expand portfolio by acquiring new revenue and earning sources.

“The variations in long-term performance were interesting, and sometimes surprising,” Pieroni said. “The outcomes of these deals differed widely across lines of business, even when motivated by the same rationales.”

In total, P/C carriers experienced higher-than-average returns after M&A transactions in all four motivation categories, with 70 percent of the P/C deals creating value throughout the analysis period.

Diversification was by far the most successful motivation among P/C insurers — driving average TSR appreciation roughly twice as high as other motivations— but was less successful in other lines of business.

Life insurers faced difficulties regardless of the rationale behind the deal, with just 36 percent of all life M&A transactions 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.

ACORD’s Carrier Mergers & Acquisitions study will be presented at ACORD Industry First on May 21.