What must insurers do next?
While the pandemic and economic downturn has thrown off the original timing for divestments, insurers should be using the time now to prepare the business for sale, and in most situations increase the level of focus and attention on this area.
Certainly, 63% of insurers said one of the main impacts from the crisis on their divestment strategy was increasing their level of divestment preparation, which will be even more crucial for sellers in getting as close as they can to achieving their price expectations.
Indeed, about half of insurers, in our pre-crisis survey, said that the price gap between sellers and buyers was more than 20%. It’s alarming that 88% now expect the price gap to increase further as a result of the crisis.
If achieving expectations was not so challenging in the past, more than half (56 %) said they met or exceeded their target price in their most recent divestment — it will be for the foreseeable future amid such turbulent markets. Therefore, the internal resources and time needed now, amid turbulent markets, to prepare an asset for sale should not be underestimated (44% said they did do so in their last disposal).
What’s more, there is a need to focus attention now on value-enhancing strategies: 47% said they should have invested more time and resources into creating pre-sale value on their recent divestment.
Key here, ahead of putting a business up for sale, will be focusing on ensuring the quality of the management team (according to 50% of insurers). Interestingly, some 68% said they would also consider an earn-out as a mechanism to achieve desired deal value.
Key divestment challenges
When selling assets, insurers need to address some important sector-specific challenges. Chief among these are client and regulatory sensitivities around data.
As many insurance products are long-term in nature, divestments are essentially a sale of a group of specific policyholders: the selling firm must ensure that these policyholders are well protected in the future — both for their sake and for the reputation of the seller.
From a regulatory perspective, any insurance entity sold must continue to be regulated as an insurer. Consequently, in some markets, regulators have pushed back on private equity-type structures unless they give the same protections to policyholders as the incumbent provider. Being acutely aware of the regulatory implications of a transaction is important: more than half (56%) said a lack of understanding around regulatory requirements deferred closing.
Another important consideration is the need to be realistic about benefits from potential synergies. When evaluating bids, insurers must scrutinize assumptions about potential efficiencies (resulting from merged back-office functions, for instance) as they may have implications for stakeholders. Many insurers would be cautious about a potential bidder assuming a massive IT synergy because of the potential impact on staff, customers, other stakeholders and the opinion of regulators.
In short, price — while important — is often not the main driver of bid selection in a divestment. The long-term outlook and protection of policyholders within the divested asset — because of its ongoing reputational and regulatory implications for the seller — can be far more significant.