The current M&A landscape in the South African Insurance industry

A key avenue for growth in the insurance industry consists of access to the right distribution channels, aligned to your strategic plans. Distribution that focuses on new channels for customer acquisition and customer engagement can fast-track relevancy and reach in markets, adding scale and new growth opportunities supported by seamless omnichannel engagement.

Increasing competition in insurers' traditional segments is enhancing the need for diversification in pursuit of new areas of growth. Addressing new customer segments and introducing new products such as loyalty programmes and “on-demand” or “pay-as-you-go” insurance can deliver greater growth. This    diversification can be built, but it can also be accelerated through M&A, with insurers assessing their own existing and developing capabilities against those that exist in other relevant players to deliver access, capabilities and scale.

In a low-growth environment with a higher cost of capital, an increasing cost to serve, enhanced regulatory and compliance requirements, and the need for continued IT investment (among other factors), consolidation for scale is an obvious opportunity for insurers to enhance top-and bottom-line performance. While the concept of acquiring goodwill remains challenging, the ability to extract synergies and drive value from such transactions can deliver material benefits if properly considered and executed. 

Insurance, like many other areas of financial services, has seen its fair share of new entrants and disruption. Yet the core proposition of insurers (customer reach, relevancy and experience, combined with fit-for-purpose products) remains. As the insurtech landscape matures and valuations stabilise (especially given the flight of capital that the sector continues to experience), established insurers benefit from the opportunity to “transact-to-transform” their technology and businesses. This is done by considering what these technology disruptors can deliver in a way that is directly applicable to their strategies as an alternative to internal development and investment. 

Develop a deep understanding of your strategy and the role that M&A can play in expediting or enhancing the delivery of that strategy. What will best suit your capabilities and requirements? And thereafter, consider a detailed assessment of the right markets, the right targets, the right deal parameters and the right metrics to underpin a successful M&A.

It is wise to gain an understanding of your internal capabilities versus the opportunity to partner with service providers. Identify service providers who can work effectively with internal teams – they need to move beyond simple risk assurance diligence, rather focusing on underpinning deal assessment through a target capability and relevance assessment lens that enhances insights and conviction regarding the acquiror’s ability to drive value from the target. 

Advances in data and analytics capabilities are creating deeper, more effective and more valuable insights into businesses, often starting from the ability to gather and ingest data that is not readily available or packaged by the target. Using these tools to position an asset for sale can also underpin greater bidder interest and appetite while building momentum on any process from the outset. Within insurance this can unlock deep and valuable insights on book-, product- and channel-level performance, deeper insights into operational effectiveness and efficiencies, and compliance and customer engagements that can enhance deal-making certainty. 

We consistently see a significant fall-off between initial principal-to-principal engagement and getting a deal done. A focus on building relationships and engagements is crucial, but getting the deal done requires a broader lens and experience of deal-making necessities and considerations. While these elements often seem less important at the outset, without appropriate consideration and communication parties may end up being disappointed with deal outcomes, having invested significant effort and time while failing to get a deal across the line. Preparing for engagement, whether on valuation, deal terms, shareholder protection and rights, or the like, will enhance the probability of deal success down the line.

By leveraging the deeper insights gained from an advanced data analytics capability in the due diligence phase, a better understanding of the value drivers within the business can be developed. This helps build more credible business plans and an understanding of what it takes to unlock value within strategic growth initiatives through integration. Focusing on post-deal integration and implementation of the value creation plan enhances the probability of maximum value-unlock from the transaction. 

While insurance by its nature improves financial wellbeing, which is a huge societal issue in Africa, it is important to ensure that responsible investing is written into policyholder documentation and will be governed by the statutory actuary. Additionally, any increases in shareholder funds held for regulatory capital following the transaction should be deployed in a sustainable manner.

Early and ongoing engagement with the regulatory authorities is key to ensuring early risk identification and responses thereto, thereby enabling a more timely approval of your transaction.

Any differences in cultures should be identified early on in the process (this is often performed during the diligence phase): 

• Differences in risk appetites or approaches to governance and compliance can cause significant delays to Day 1 as well as to the realisation of the business case post Day 1.
• Significant differences in ways of working that are not supported by a robust change management plan can threaten the realisation of the value envisaged for the deal.
• Understanding the cultural nuances of the market and how these are likely to impact strategy and business model decisions is critical to value enhancement.

Deals in the insurance industry often cite system synergies as a cornerstone of their business case. Sufficient attention should be given to the scalability of the policy administration software (PAS), the implementation costs, the safe and secure transfer of data (taking into account POPIA considerations) and the quality of data during the integration planning phase.

The integration of people, processes and systems can significantly impact the overall cost of a transaction. This effect has become even more pronounced since the introduction of IFRS 17. During the pre-deal due diligence phase, it is crucial for the deal team to comprehend where integration opportunities exist within the businesses. Furthermore, the related complexity, timelines and costs to implement the integration need to be understood to empower the business to make informed decisions during the deal approval process. It is also important to identify and adequately budget for future expenses which are necessary to unlock the deal’s envisioned value.