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2000 General Insurance Convention

2000 General Insurance Convention. Making Mergers and Acquisitions Work Peter Copeman 27 October 2000. Mergers and acquisitions. What is driving M&A now?. M&A Strategy and Change Management. The Future. Key Issues for Non-Life. Industry consolidation 36% Excess capital 24%

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2000 General Insurance Convention

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  1. 2000 General Insurance Convention Making Mergers and Acquisitions Work Peter Copeman 27 October 2000

  2. Mergers and acquisitions What is driving M&A now? M&A Strategy and Change Management The Future

  3. Key Issues for Non-Life ... Industry consolidation 36% Excess capital 24% New distribution channels 23%

  4. Convergence/ new entrants/ retail reconfiguration Capital Markets pressures Continuing consolidation in FS in Europe Euroland/ globalisation Distribution There are four key drivers of consolidation in FS in Europe and numerous examples of their impact

  5. The top 5 players in each of the largest European markets have a significant share (Life and Non-life) in those markets Individual EU markets have significant concentration Source: Tillinghast Towers Perrin

  6. Six of the top European players between them do not have a dominant share of European Premiums (Life and Non-life) However, despite dominance in local markets, overall Europe is still a relatively fragmented market Source: Sigma, Report & Accounts, Bloomberg

  7. Market Capitalisation 89 90000 80000 70000 60000 54 50000 42 40000 33 32 32 30 29 30000 20 19 19 18 20000 15 11 8 10000 5 0 AXA CGNU AEGON ALLIANZ FORTIS GENERALI SWISS RE R PRUDENTIAL AMER.INTL.GP. ALLSTATE CORP. CREDIT SUISSE R LEGAL & GENERAL ING GROEP CERTS. ROYAL & SUN ALL.IN. MUNCH.RUCK.REGD. BERKSHIRE HATHAWAY UK insurers look small

  8. Strategic Positioning - Financial Service Focus 70 60 58.1 50 Today 40 % responding By 2005 28.3 30 26.3 20 17.2 16.7 13.6 13.1 8.6 8.6 10 4.5 0 Insuranceservices provider Insurance only Alliances with bank/assets managers Alliances and ownership in banking/asset Financial services conglomerate management

  9. Strategic Positioning: International Focus 70 63.6 60 50 44.4 Today 40 % responding By 2005 30 26.3 19.2 20 14.6 12.1 8.6 7.1 10 0 No revenues from overseas 1-20% revenues from overseas 21-40% revenues from overseas >40% revenues from overseas

  10. Strategic Positioning by Company Size >40% rev. from overseas Convergence and cross border consolidation Global aggregators Global specialists 2005 >$1 billion revenues 20% revenue from overseas <=$1billion revenues Niche players Domestic aggregators Today 2005 Today Convergence No revenue from overseas Niche P&C Multiline P&C P&C plus 1 other P&C plus 2 others Broad-based fin. services

  11. Mergers and acquisitions What is driving M&A now? M&A Strategy and Change Management The Future

  12. Cope with convergence • Establish new growth platform • Extend global brand • Add ‘third leg’ for growth • Increase market share • Obtain critical mass • Add capabilities • Increase margins • Diversify portfolio M&A strategies and risk • Geographic reach and business relationships drive different strategies and determine risk Strategiclogic in M&A Cross-border Geographic Reach Domestic Non related Same Related Business Relationship RISK: Low Medium High Very High

  13. Study after study has shown that most acquisitions fail to create value for the acquirers’ shareholders Merger costs are recovered within 10 years in only 23% of transactions Frequently quoted research findings on the results of mergers and acquisitions Of 150 recent deals valued at $500m+, about half destroyed shareholder wealth Barely 50% of mergers and acquisitions between financial organisations have created value for shareholders In reality few deals result in the increase in value originally anticipated

  14. Transaction must support a broader strategy Value will be lost without a detailed plan Integrate quickly - faster is always better CLEAR PURPOSE COMPRE- HENSIVE PLAN CORRECT PRICE COMPELLING PACE COMMITTED PEOPLE Demonstrate transaction benefits CONTROLLED PROCESS Define the value of the target within the context of your strategy Value maximization requires diligent process management The keys to delivering value

  15. Chasing competitors • Barnyard behaviour • Horse trading • Doing the deal at any cost • Creating a planning circus • Obsessive list making • Incentivising inertia • Preaching platitudes • Content free communications Remember that it is easy to lose focus... The deadly sins The six perfect virtues (the six P’s) • Purpose - be brutally honest about your purpose • Process - rigorously manage the whole deal continuum • Price - pay the right price for you • Plan - plan and act (do it now) • Pace - act with incredible speed • People - communicate meaningfully & act with absolute integrity

  16. Target availability and price to gain control Availability Make up of shareholder base Existence of significant blocking stakes Presence of Governmental/ Regulatory blocks Status of strategic alliances and joint ventures - Price to gain control Premium expectation Resulting price to book and other indicators Resulting earnings per share dilution period

  17. Share premium to gain control €1.8 bn Minimum level of synergies to avoid shareholder value diminution Implied Value Gap €0.3 bn Bid premium already in market value. Value of Insurance Business net assets including unrealised gains €2.2 bn Carry out an “Economic andValue Gap analysis”on target ….. between the market capitalisation of an insurance group and a DCF valuation Economic value DCF Valuation Value €bn Current Market value at xx/xx/00 of the target insurance company €5 bn Value of future new business €0.9 bn ILLUSTRATIVE Value of business inforce €1.6 bn

  18. Independent economic value analysis of potential acquisition targets Net value of synergies £2.4bn Target Economic value Net Revenue Synergies Net Cost Synergies Perform high level economic value analysis on proposed group ….. and identify the real deliverable value £17.4bn £6.8bn £5bn Value enhancement £0.6bn ILLUSTRATIVE £1.4bn £1bn £10bn • Benefits to Acquiror £0.6bn • Benefits to Acquiree £1.8bn Economic value of new combined group Acquiror Economic value Expected Bid price

  19. Customers & Markets Organisation Structure Processes Products & Channels People & Culture Systems & Technology Key external barriers and risks Governmental Regulatory Shareholder Competition law

  20. Organisation structure and senior appointments Branding and target market issues Integration, transfer or migration to a new platform? Building a newculture quickly Key internal barriers and risks Customers & Markets Organisation Structure Processes Integration of front and back offices Managing potentially competing channels, retaining distribution, product rationalisation and cross selling Products & Channels People & Culture Systems & Technology

  21. However straightforward the merger may appear to senior management, staff will be traumatised and customers concerned • Fully resourced communications and HR Transition Team • Strong senior direction concerning scale and ambition for programme • Strong central programme management with a passion for managing interdependencies across business units and functions • Don’t let the merger out of your sight - “It’s my business/function - I’ll sort it out” • Ideas that look good from the Conference Room of a Merchant Bank sometimes don’t look so good from the customer service centre • Robust bottom-up assessment of opportunities, with vigorous challenge • Use the Business Case as the glue to deliver the benefits Three things to remember about mergers

  22. Mergers and acquisitions What is driving M&A now? M&A Strategy and Change Management The Future

  23. Key Issues for Non-Life ... Now… Industry consolidation 36% Excess capital 24% New distribution channels 23% … 2005 New distribution channels 23% Convergence 35% E-commerce 35%

  24. Financial Times Extract

  25. Kaj Ahlmann, Chairman and Chief Executive of Employers Re Corporation says... “I believe people who have access will transfer blocks of business to people who have strong balance sheets. Everywhere someone is in touch with a group of people, a block of insurance business can be created and transferred to a balance sheet. When you lease a car you can put insurance with it, when you sell a mortgage you can put insurance in it. We could see a primary insurance company as something that could be disintermediated .”

  26. Convergence-based strategies are much easier to implement in cyberspace Software Travel Insurance Flights Hotels Cars Holidays Consumer electr. Books CDs ? Insurance Banking Investment banking Shares

  27. Putting it right Managing customer access Risk pricingandunderwriting Loss Prevention Cashflow management Catastropheprotection (ie Capital) The value chain for today’s non-life insurer looks like this...

  28. The opportunity is to move into value networks with little vertical integration Brand holders Product design Processing specialists Web site host / distributor Risk pricing and underwriting Putting it right

  29. Conclusions • Cross border M&A will continue as dominant pan-European players emerge • Shareholders will demand clarity on value before …… …. and after the deal • Convergence and e-commerce will increasingly drive acquisition behaviour over the next five years

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