P&C-industry M&A dealsin 2018 are expected to be very much in line with those seen in thelast several years.

Talk about setting the tone for mergers & acquisitions inthe P&C market this year.

In a notable move away from financial risks and pivoting towardinsurance risks, AXA announced that it is acquiring XL Group Ltd. in a sizable $15.3 billion cashtransaction. The deal seizes on a strategic opportunity for AXA toshift its business profile from mostly life & retirementbusiness to predominantly P&C business, and positions XL Groupas the No. 1 global P&C commercial-lines insurer based on grosswritten premiums.

Once the acquisition is completed, AXA and XL Group's combinedP&C commercial lines operations will enjoy a solid position inthe large and upper mid-market space, including in specialty linesand reinsurance. The deal also strengthens AXA's presence in thesmall and medium-size business segment.

So much about mergers & acquisitions in the P&C space isabout achieving scale, and adding strength and talent the buyerdoes not yet possess. And to hear Boris Lukan tell it, for several key reasonsthe weather is ideal for multiple M&A deals to take place thisyear. (For Deloitte's in-depth look, check out its 2018 Insurance M&A Outlook report.)

Lukan leads the U.S. Insurance M&A and Restructuringpractice for Deloitte Consulting; now in his 25th year withDeloitte, he is one of the firm's most experienced insuranceconsultants, focusing on post-merger integration, M&A strategy,commercial & operational due diligence, and enterprise-widecost reduction & restructuring.

Deal volume in 2018, he said, is expected to be largelyconsistent with the increase in M&A seen in 2016 and 2017 (withvalues raging between $5 billion and $15 billion, on average) ascompanies look to utilize M&A to achieve strategicobjectives.

“This kind of deal is not new to the world, to be sure, but whatis new is the notable uptick in transactions,” Lukan toldme. “Our observation is that this is a new development.”

Environmental conditions, he said, are ripe to continue theinsurance M&A activity of 2017's second half. Investor andconsumer confidence is high; the U.S. and global economies areimproving; U.S. tax reform was signed into law; interest rates aremoving in the right direction; organic growth remains elusive; andavailable capital remains at an all-time high.

The fundamental driver behind M&A in the P&C business,he said, remains strategic acquisitions. “Buyers still buy forstrategic reasons, as opposed to financial engineering,” he said.But that's hardly the only reason.

“In the last 18 months, we've seen multiple CEO changes in theindustry,” Lukan noted. “And not smaller, fringe companies. We'retalking brand-name global insurers, global or regional CEOs.”Changes at the top at that level of frequency can be a stimulantfor M&A, he added, that correlates with a strategic shift incorporate strategy, including the divestiture of non-corebusinesses.

“This degree of change doesn't happen every year,” he added.“Recently, it's been quite substantial. Because some of thesecompanies have M&A capability, that makes it a driver.”

Given the near-record number of severe natural catastrophes in2017, one could ask whether that would translate into the potentialfor rate increases – and if it did, would they be robust enough totranslate into real growth, and an impediment to M&A? Lukansays no.

“Rate increases are isolated, and are not going to be sufficientenough in the aggregate to be a growth driver this year,” he said.“They're not going to be substituting much for organic growth.”Thus, companies look elsewhere in order to achieve that growth.

Lukan noted that company valuations in the P&C industry inthe last decade are near 10-year highs. “They are fullyvalued,” he said. “They're pretty expensive right now, on ahistorical basis. That makes it harder for buyers to bring a pricethat would be deemed sufficient to the seller. With P&Ccompanies trading that high they're set up as a headwind forM&A, especially within the P&C sector.”

InsurTech is another factor, and it continuesto garner considerable industry attention given the strategicimportance of technology investments. As detailed in Deloitte's“TheState of the Deal: M&A Trends for 2018” report,acquiring technology assets ranks No. 1 as a strategic driver ofM&A activity.

Most companies, Lukan explained, are making relatively smallinvestments (in the $5 million to $20 million range) in developingtheir own in-house solutions. In a lot of cases, it's a better betto find something external that a company can buy to better powerits operations.

“There's a ton of attention around [InsurTech], due to itsstrategic significance,” he said. “What we're anticipating is thatthis going to begin to involve to more outright acquisitions. Thatwill accelerate. Traditional insurers may need help in becomingmore digitally enabled or supplementing their in-house data andanalytic skill sets. InsurTechs will refine their value propositionin the capabilities they've built or in the teams they'veassembled. In those cases, the solution is so unique and sovaluable that the insurer doesn't want to be a customer; they wantto own it.”

Lukan's advice for those contemplating M&A:

* Examine your existing portfolio * Consider divesting assetsthat may no longer be core * Evaluate acquisitions or investmentsthat will improve positioning in core markets * Perhaps mostimportant, he emphasized, thorough due diligence and effectiveplanning for integration should be the focus at thebeginning of the process, not after the transactioncloses.

The 'Human Factor'

Indeed, if there's one thing that seems to get significantlyless attention in M&A transactions, it's how those acquisitionsare managed, post-buy. Remember that companies are staffed withhuman beings, who more often than not quickly grow concerned fortheir jobs once they know new talent has been brought into the fold– on either side of the buyer's desk. The process of establishing anew culture at the entity being acquired is the responsibility ofthe buyer, and that task has to be managed mindfully and with asmuch transparency as possible.

“Having successfully completed over 90 acquisitions during my 10years here, we've recognized how important the post-closeintegration efforts are to the long term success of the deal,” saysNahua Maunakea, Executive Director of GlobalRisk Management for global information company IHS Markit Ltd. Its services include effortssupporting business development, including mergers &acquisitions, due diligence and integration.

“The quicker you're able to get the new members to become partof the fabric of the organization, and have them understand andembrace the culture (or in some cases, you adopting to incorporateaspects of theirs), the greater the chances the learning curve willbe shortened,” he adds.

“The lessons we learned and best practices we'd developed wereput to the test when we merged with a company, and all ofa sudden the shoe was on the other foot, so to speak,” hecontinues. “We were now the ones with the questions: What does thisdeal mean? Will I still have a job? What will the job be like inthe 'new' company? What will our culture be? Will I fit in? Thankgoodness the management team and others responsible for theintegration have done a very good job of communicating the goalsand key steps of the process, providing regular updates, makingthemselves available for questions from us, and encouragingfeedback and dialogue.”