Life2016: Using M&A to optimise your business
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Transcript of Life2016: Using M&A to optimise your business
Using M&A to optimise
your business
Waheeda Narker,
Fergal O’Shea,
Brian Shea, Steve Allan
What next for the Risk FunctionKirsty Leece and Liz Ryan
Commercial Risk Director, Zurich
Session 2Chaired by Marcus Bowser
Life2016
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#WTWLife16
Agenda
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Fergal O’Shea: M&A trends and the external environment
Waheeda Narker: Optimise or sell? (A case study)
Brian Shea: How the investment community views M&A
Steve Allan: HR considerations key to deal success
Using M&A to optimise your business - Agenda
Future
Low interest rates
Economic uncertainty
Capital strain
Declining new business
Shareholder shake-up
Regulatory uncertainty
Distributor value RDR review
Customer proposition – Efficient and
profitably managed
Product relevance – Diversity vs. niche
Distribution – More economic
Growth challenge - Increased penetration in
emerging markets and in selected market
segments in mature markets
Capital optimised
Consolidated sector
Solvency II goes live
Capital focus 2016
What we see happening in the European Life sector
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MARKET BACKGROUND
2010
Deal Activity
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DEAL ACTIVITY
0
10
20
30
40
50
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Deal V
alu
e (
€bn)
EMEA Deal Breakdown by Value (€bn)
Life Insurance Composite Insurance Property & Casualty Insurance Reinsurance
EMEA Life M&A activity since financial crisis
Globally
M&A volumes
recovering
Mega-deals are
back
EMEA Life
Still holding back
UK Life
Significant activity
Deal Drivers
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Capital & consolidation going forward
DEAL DRIVERS
Transformational
deals
Bailouts & distressed
sales
Topline
Consolidation
Scale
Diversification
Capital and portfolio
management
More consolidation
More consolidators
More markets
Capital
Solvency II
G-SII
Basel III
Local regulatory
Portfolio management
Buyers
Traditional participants
Non-traditional players
PE
Asians
SWF’s
Agenda
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Fergal O’Shea: M&A trends and the external environment
Waheeda Narker: Optimise or sell? (A case study)
Brian Shea: How the investment community views M&A
Steve Allan: HR considerations key to deal success
Using M&A to optimise your business - Agenda
WTW Perform Opportunity Assessment Considering…
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Optimise
value
Increase asset risk
Predictive modelling
Reinsurance
Impact
of
sale
Simulate sale prices
Impact on metrics
“Walk away price”
?vs.
Optimised Portfolio
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Technical
Provisions
Capital
Assets
Surplus Assets
Technical
Provisions
Capital
Assets
Surplus AssetsRelease of capital
Release of
reserves
No Matching/Volatility
Adjustment
Value of benefit after loss of future profits and capital releases:
£45m
Current Optimised
13bps
Matching
Adjustment
1.5% GLM
demographic
assumptions
£55m
distributable
cash benefit
after tax
With Matching/Volatility
Adjustment
Reinsurance
Sale Impact – Peer Companies were Earning Significantly Higher Yields
(After Allowing for Defaults)
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-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
Co 1 Co 2 Co 3 Co 4 Co 5 Co 6 Co 7 Co 8 Co 9 Co 10 Co 11 Co X
(bp
s)
Co X
Competitive Tension will Drive Buyers to Price in a Significant Yield Uplift
(Compared to X’s Portfolio)
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14 21
62
101 105 106
129
168 169
183 186
-
20
40
60
80
100
120
140
160
180
200
Co 1 Co 2 Co 3 Co 4 Co 5 Co 6 Co 7 Co 8 Co 9 Co 10 Co 11
(bp
s)
Possible range for buyer
pricing enhancement
Simulation of Buyer Price – 50bps and 100bps Yield Uplift
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Current position
Capital
Technical
Provisions
£1 bn
Buyer 50bps uplift:
95% reserves
Capital
Technical
Provisions
£950m assets
Buyer 100bps uplift:
90% reserves
Capital
Technical
Provisions
£900m assets
Impact of Disposal on Distributable Cashflow
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0.00
1.00
2.00
3.00
4.00
5.00
6.00
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
Cashflow Capital Release including investment income
Sales at
(£m)
Purchase
Price
Received
Tax Capital
Released
Distributable
Cash on Sale
95% reserves 50 (10) 60 100
90% reserves 100 (20) 60 140
Loss of
Future
Profits
Value of
Future
Capital
Releases
Value
Benefit
After Tax
(20) (25) 55
(20) (25) 95
Impact of Disposal on Net Income After Tax
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The graph shows the estimated reduction in NIAT
This compares with the balance sheet impact shown above
£m
Initial
IFRS
Liabilities
Book Value
of Assets
Transferred
Impact
before
Tax
Tax Net
IFRS
Impact
Sale at 95% reserves 885 895 (10) 2 (8)
Sale at 90% reserves 885 850 35 (7) 28
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
1 2 3 4 5 6 7 8 9 1011121314151617181920212223242526272829303132333435363738394041424344454647484950
Millio
ns
Impact of Disposal on Economic Capital and MCEV
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(£m) Current
EC
Available EC
(no illiquidity
premium)
35
Required
Capital
(45)
Reduction,
Free Capital
(10)
Sale proceeds
Total Benefit
(£m) Current
MCEV
MCEV (40
bps
illiquidity
premium)
60
Sale
proceeds
Total
Benefit
Economic Capital MCEV
Sale at
95%
reserves
Sale at
90%
reserves
45 45
50 100
95 145
Sale at
95%
reserves
Sale at
90%
reserves
(60) (60)
50 100
(10) +40
Optimise vs Sale
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MCEV:
£(60)m plus £50m
Distributable cashflow:
£55m
Net IFRS Impact:
£(8)m
EC:
£45m Capital Release
plus £50m
90%
reserves:
£100m
95%
reserves:
£50m
Sale
£45m benefit
internal
optimise
<=95%
reserves
“walk away
price”
MCEV:
£(60)m plus £100m
Distributable cashflow:
£95m
Net IFRS Impact:
£28m
EC:
£45m Capital Release
plus £100m
Board Decision
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Sale
Buyer perspective
ROC
Risk appetite
Metrics impact
Capital release
Future earnings
“Walk away price”<=95%
Outcome
Competitive tender
c90% of reserves
>£100m cash benefit
WTW performed
Appraisal and ran
Auction
Why do Investors own the European Insurance Sector?
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Sector has outperformed over the past five years… . . . at a time when fundamentals are deteriorating
40%
60%
80%
100%
120%
50
150
250
350
€ 450
1/01 1/04 1/07 1/10 1/13 1/16
STOXX Europe 600 Insurance – Price (€)
STOXX Europe 600 Insurance – Relative Value to STOXX Europe 600 (%)
Source: FactSet.
Interest rates have declined to record
lows
Life growth has slowed
Non-life pricing is under pressure
Agenda
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Fergal O’Shea: M&A trends and the external environment
Waheeda Narker: Optimise or sell? (A case study)
Brian Shea: How the investment community views M&A
Steve Allan: HR considerations key to deal success
Using M&A to optimise your business - Agenda
Investors Own Insurance for Cashflow and Dividends
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Group-wide FCF generation remains robust
€12.4 €14.9 €15.2 €16.4 €16.3 €19.1 €18.2 €19.1
€11.7 €5.4
€14.0 €19.6 €17.7
€20.7 €20.0 €20.9 €24.2 €20.3
€29.2
€36.0 €34.0
€39.8 €38.2 €40.0
0.0
12.5
25.0
37.5
€50.0
2010 2011 2012 2013 2014 2015E 2016E 2017E
Sector Life FCF Generation P&C & Other FCF Generation
(€ in billions)
2016E FCF usage well covers financing & dividend costs
59%
25%
11%
5%
Dividend Costs
Retained Cash
Financing Costs
Buybacks
Insurance Sector FCF Yield is among the most attractive in Europe
8.1% 7.2% 7.1% 7.0%
6.2% 6.1% 5.8% 5.5% 4.9% 4.8% 4.7% 4.7% 4.3% 4.2% 4.2% 4.2% 4.0% 3.9% 3.7% 3.5%
0.5%
0%
2%
4%
6%
8%
10%
Ba
nks
Life
Insura
nce
Insura
nce
Non-L
ife
Insura
nce
Technolo
gy
Media
Tele
com
s
Ph
arm
a
Dvrs
f'dF
inancia
ls
Avera
ge
Tra
nsp
ort
ation
Mate
rials
Au
tos
Pe
rsonal G
oods
Real E
sta
te
Food &
Be
vera
ge
Utilit
ies
Capital G
oods
Reta
il
Healthcare
En
erg
y
Investors will judge any back book transaction in terms of how FCF and dividends are affected
Source: BofA Merrill Lynch Global Research.
0
20
40
60
80
100
120
Analyst Fair Values for the Life Segment of a European Composite
FV EV
0%
10%
20%
30%
40%
IFRS book value Tangible bookvalue
Embedded value IFRS earnings Dividend yield Free cash flowyield
Which valuation approach will gain the most in popularity over the coming 12m?
Dec-09 May-10 Sep-10 May-11 Oct-11 Jun-12 Sep-12 Dec-12
FCF has replaced EV as a valuation tool amongst investors
Source: BofA Merrill Lynch Global Research and other analyst research.
Embedded Value is a less Important Metric for the Investment Community
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European life insurance companies
no longer trade at a premium to EV . . .
Analyst fair values typically lie below EV
0.7x
1.0x
1.2x
1.5x
1.7x
2.0x
2.2x
2.5x
2.7x
'97 '99 '02 '05 '08 '10 '13 '16
Pri
ce
/ E
nte
rpri
se
Va
lue
37%
46%52%
58%65%
81%85%
89%93% 95%
102% 103%107%
115% 117%119%
0%
20%
40%
60%
80%
100%
120%
140%
Delta
Llo
yd
. . . and many currently trade at a meaningful discount
Sto
reb
ran
d
AE
GO
N
Sw
iss L
ife
Ge
ne
rali
Ag
ea
s AX
A
Se
cto
r A
ve
rag
e
Aviv
a
NN
Gro
up
Old
Mu
tua
l
Pru
de
ntia
l
Sta
nd
ard
Life
Alli
an
z
L&
G
ZIG
Selling at less than EV could still be accretive to your company’s valuation
The Metrics That Matter More When Investors Assess M&A
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Impact on IFRS results
One-off impact on book value less important
Any impact on on-going earnings is more important
Especially if it impacts expectations about the dividend
Impact on solvency ratio
Especially if it impacts expectations about the dividend
Impact on volatility of capital
Especially if it impacts expectations about the dividend
140%
150%
170%
130%
150%
160%
180% 175%
140%
170%
180%
230%
160%
200%
220% 220%
180%
0%
25%
50%
75%
100%
125%
150%
175%
200%
225%
250%
Companies are working to reduce the
sensitivity of their solvency ratios
Still a wide range of sensitivities
today . . .
. . . and this is driving differences in
target solvency ratios(2)
Capital Volatility is Under the Spotlight
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Example: Allianz
-80%
-60%
-40%
-20%
0%
20%
40%
Credit Spread +100bps
Equity Markets -25%
Equity Markets +25%
Interest Rates -50bps
Interest Rates +50bps
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Q4 14 Q4 15
Credit Spread +100bp
Equity Market -30%
Equity Market +30%
Interest Rates -50bp
Interest Rates +50bp
(1) Figures: Q4 15. (2) Generali does not specify an upper limit for its target solvency.
(1)
A transaction that lowers the volatility of capital,
and therefore may lower a company’s target solvency, is dividend-generative
It’s all about capital & dividends
Analyst Reactions to Back Book Disposals are Generally Favourable
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Zurich: Sale of UK Annuity Book to Rothesay Life (May 2015)
Aegon: Sale of remaining part of UK annuity portfolio to Legal & General (May 2016)
“Transaction reduces credit and longevity risk and releases cash. Group capital impact $208mm” (Zurich Investor Day Presentation)
“Aegon divests another £3bn of annuity portfolio in the UK… to L&G, releasing £275m of Solvency II capital, with the Solvency II ratio increasing
15pts at the outset and another 5pts following the Part VII transfer. Results in an IFRS loss of c£215m in Q2, reduces annual capital generation by c
£30m, underlying earnings before tax reduce by £16m…. This should be sentiment positive for both: Aegon for disposing of non-core business;
L&G for winning a bulk annuity deal in line with cost of capital hurdle rates.” (Morgan Stanley analyst comment)
“The transaction is expected to add +20%pts to the UK S-II ratio. The impacts… on free capital generation are negative -£30m and on underlying
earnings before tax -£16m…. Following its disappointing 1Q16 results, where S-II disappointed badly, this is at least helpful relief for AEGON in
terms of capital.” (Autonomous analyst comment)
“[AXA] believe they have better opportunities to redeploy this capital elsewhere…. Approximately €400m from the UK will likely be up streamed, with
the remainder (~€400m) staying locally to fund the pensions business.” (Barclays analyst comment)
“[AXA] has postulated an annual M&A budget of ~€1bn, potentially hitting the S-II ratio by between 3%pts (mature markets) and 6%pts (growth
markets). Clearly a sale of AXA UK would add up to nearly €1bn to its M&A fire power.” (Autonomous analyst comment, reacting to Bloomberg story
shortly before deals were announced)
Swiss Re: Sale of US Admin Re to Prudential (May 2012)
US GAAP loss of $0.4b, but ‘economic’ gain of $0.3b, and $0.9b of capital freed up
“Redeploying the funds freed up through this transaction within the Swiss Re Group will have a beneficial impact on all three of our financial targets
in the future, that is to say return on equity, earnings per share and economic net worth growth.” (Michel M. Liès, Group CEO)
“A positive for the company, even if the deal multiple is low. The deal is likely to free up economic capital, which allows either faster growth in non-
life or eventual higher distribution to shareholders.” (Morgan Stanley analyst comment)
Axa: Sale of its UK wrap platform & offshore investment bonds business (April-May 2016)
Agenda
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Fergal O’Shea: M&A trends and the external environment
Waheeda Narker: Optimise or sell? (A case study)
Brian Shea: How the investment community views M&A
Steve Allan: HR considerations key to deal success
Using M&A to optimise your business - Agenda
Incompatible cultures 5.60
Inability to manage target 5.39
Unable to implement change 5.34
Synergy nonexistent or overestimated 5.22
Did not anticipate foreseeable events 5.14
Clash of management styles/egos 5.11
Acquirer paid too much 5.00
Acquired firm too unhealthy 4.58
Need to spin off or liquidate too much 4.05
Incompatible marketing systems 4.01
People Considerations that Impact Deal “Value Realisation”
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Source: 2009 Global Pulse Survey.
Open communicating with employees
throughout the transition
Influencing effectiveness of
senior leadership
Deploying workforce effectively
pre-, during & post-transition
Creating & implementing strategies
to retain key employees
Creating and implementing staffing
strategies aligned with talent strategy
Assigning best resources
to the integration team
Cultural alignment
Very successful
deals focused onLess successful
deals focused on
Early, intense focus on people issues
Source: Survey of Forbes 500 CFOs. Assessed on a scale of 1 to 7, where 7 is high.
19%
20%
26%
19%
32%
40%
15%
38%
39%
47%
41%
56%
65%
42%
15%
42%
40%
41%
19%
47%
26%
39%
20%
38%
19%
56%
65%
32%
Rank
Top Ten Pitfalls in Achieving SynergiesNegative
Impact
Private Equity
Sovereign Wealth Funds
New investors from
emerging markets e.g. Asia
Alternative
Business
Partners
Capital and solvency
measures
Cash flow and
restructuring impact
Optimising financial
position
Financial
Strategy
Consolidation
Targeting emerging
markets
Innovation and
alternative distribution
mechanisms
Themes from Today
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Business
Strategy
People Issues Key Consideration in Deal Planning
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Workforce and integration planningPeople programs and financials
Financial
Issues
Material people-related balance sheet and P&L items
e.g. retirement benefits, leave provisions, termination
indemnities
Review any areas of HR non-compliance and
estimate remedial costs
Labour law implications e.g. severance triggers,
changing employing entity, new contracts
Financial run rate of compensation and benefit plans
Executive change in control / severance
provisions and valuation of financial impact
Assessment of executive compensation
competitiveness
Assessment / benchmarking competitiveness of
compensation and benefits
Synergy realization timing and restructuring costs
People Issues
Summary of compensation, benefits and people
programs
High level review of competitiveness
of people programs
Review of employment contracts, union/enterprise
agreements
Design executive compensation options
dealing with transition issues e.g. retention,
public to private, change of roles
Review of succession plans
Executive transition roadmap
Retention design for key talent
Review of company labour environment and anticipated
transition / operating issues
Workforce profile e.g. attrition, roles, service, gender mix
Review of employee research data
Cultural alignment to business strategy
Review of HR service delivery mechanisms
Summary of key issues and mitigation for input to
integration planning
Key to deliver deal
value
Focus on maintaining
BAU
Implementation
Executive compensation and retention
People issues included
as a key consideration in
deal objectives
Target Identification
Key financial exposures from people plans
and programs
Leadership, talent change-in-control risks
and retention
Early Stage Due Diligence
Successful acquirers
build an integration plan
based on deal objectives
Pre-Close Planning
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Conclusions
#WTWLife16
External environment
The significant M&A activity seen to date could even accelerate.
The main deal drivers going forward will be capital and consolidation.
There is good buyer interest in European life insurance companies/books, including new types of buyers.
The thought process for the potential seller
Consider the value to optimise vs. sale of the business? At minimum this gives the Board an indication of your
“walk-away price” if you go down the sale route.
You need to consider the impact of a disposal on a number of metrics: Statutory Cashflow Basis, Economic
Capital, MCEV and IFRS.
How your external stakeholders will react if you sell
Embedded value is no longer an important metric for the investment community.
It’s all about cashflow and dividends.
You can have transactions at below EV, which still increase your company’s stock market valuation
Conclusions
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HR considerations are key to ensure the deal delivers value
At the earliest phase of deal cycle – be clear on deal objectives and the key HR implications.
Financial due diligence focused on quantification of key financial exposures from HR programs, identification of
key leadership risks and highlighting other material deal-critical factors.
Implementation planning starts before close, building on DD findings. Implementation then balances integration
activities with maintaining BAU.
QuestionsLife2016
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#WTWLife16