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Middle East Special: Navigating the M&A market

(Re)thinking Insurance Podcast: Season 3 – Episode 1

January 16, 2023

In this episode, we explore what is happening in the Middle East market in terms of M&As and what it means for insurers operating in the region.
Insurance Consulting and Technology|Mergers and Acquisitions

With Merger and Acquisition (M&A) activity in the Middle East continuing to increase, the implications for insurers, people, processes and systems can be significant and far-reaching. However, it simultaneously presents unparalleled opportunities to drive growth, deliver faster decision-making, and create new opportunities in unexplored markets.

In this episode of (Re)thinking Insurance, Matthew Facey is joined by M&A experts Roshail Khalid and Darragh McHugh, who explore what is happening in the Middle East M&A market and what it means for insurers operating in the region.

[The Middle East] is going through many M&As and, especially in the UAE, we are expecting to see more in the near future”

Roshail Khalid | Senior Consultant, Insurance Consulting and Technology

Episode 1: Middle East Special: Navigating the M&A market

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About the host

Director and Middle East Leader, Insurance Consulting and Technology

Matt is the Insurance Consultancy and Technology Leader for the GCC. A Senior Director with over 20 years’ experience in the London Market & Lloyd’s and personal lines insurance, Matt also has more than 15 years’ experience of the insurance industry in the GCC, ranging from reserve reviews, capital model builds, and price optimisation through to strategic business planning for (re)insurers.

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(Re)Thinking Insurance Podcast Season 3, Episode 1: Middle East Special — Navigating the M&A Market

DARRAGH MCHUGH: The crucial thing from an actuarial perspective is having an M&A team that has a mixture of both people who the business and the market really well, and also M&A specialists who know how these processes work.


SPEAKER 1: You're listening to (Re)Thinking Insurance, a podcast series from WTW, where we discuss the issues facing P&C, life, and composite insurers around the globe, as well as exploring the latest tools, techniques, and innovations that will help you rethink insurance.


MATT FACEY: Hello, and welcome to a special Middle East edition of (Re)Thinking Insurance. I'm your host, Matt Facey, and today I'm delighted to be joined by my guests, Roshail Khalid. Roshail is a Senior Life Consultant in our Dublin office who recently joined us from the UAE. And Darragh McHugh, he's a director in our UK and Ireland ICT division, and he's an M&A proposition leader for EMEA. Roshail and Darragh are experts in M&As and structuring deals not only in the Middle East but globally, so welcome to you both.

DARRAGH MCHUGH: Thanks, Matt. Looking forward to discussion today.

ROSHAIL KHALID: Thank you, Matt.

MATT FACEY: Cool. So in today's episode, we're going to explore what is happening in the Middle East market in terms of M&As, and what that means for insurers operating in the region. M&As are somewhat complex and has wide reaching implications for insurers' people, processes, systems, and data.

At the same time, it presents unparalleled opportunities for companies to start afresh, to gain insight into their own business, and to drive growth that will deliver both decision making, free up capital, and deliver opportunities in markets not known about yet, and also, allow them to focus on more value-add opportunities. It also helps underpin the long-term business and success of their companies. But before we get into that discussion, first, let's find out a little bit about our guests.

So what I try and do is just throw out a random question to you both. So Roshail, tell me what your favorite book is. And if that's too difficult, tell me what your three favorite films are.

ROSHAIL KHALID: Thank you, Matt. Yeah, it is a of bit difficult question because I'm not into reading books as such, which is not something to be proud of. But yeah, on the movies I think I can comment on it better.

So the three best movies that I've watched so far, the top most would be The Shawshank Redemption. The second one would be The Green Mile. These are all old movies. And the third one would be The Schindler's List. All these movies are classic, they're really good.

These are the movies with a brilliant mixture of emotions and drama, not something with extreme thrill, nothing too action about it. But yeah, overall these movies are really nice. They keep you engaged throughout.

MATT FACEY: Very good. Good choices, good choices. I like all those three. Go to Darragh, same question to you, maybe a book or your three favorite films.

DARRAGH MCHUGH: I think it'd be hard to follow Roshail's picks for films, so maybe I'll stick to the book then. Yeah, I think maybe All Quiet On the Western Front, which was actually recently made into a-- I think it's been made into a film a couple of times. And there's a new one out on Netflix but it's-- yeah, it's a very good book, one of my favorites.

MATT FACEY: Perfect. So I've got going from All Quiet On the Western Front to the Middle East. So I'm just going to get started with some specific M&A questions really to get you warmed up, and then we're going to delve into the M&A market within in the GCC and the Middle East, specifically. So I guess, Darragh, just first question to you, like how would I know when is a good time to sell my business?

DARRAGH MCHUGH: Yeah. No, there's probably a couple of indicators. It's a good question. I suppose one of the first ones, and it's maybe a little bit of an obvious one, is when the regulator taps you on the shoulder and tells you that you have to.

Obviously you don't hope that you'll end up in that scenario. But of course, we have seen a lot of companies impacted by extreme events over the past number of years, and indeed, even recently, whether it be COVID or extreme market movements, and those that may be just struggling with solvency cover and with scale, being prompted then by a regulator to look for a sale or a merger. And this is something that we've seen in quite a few of the Middle East markets.

It's a tricky situation, too, as it may limit your prospective buyers. And the buyers that are there, they'll know that there may be issues, and there may be a time limit as well imposed on it all. So maybe stepping away then from that maybe more direct reason, some of the other ones then one that we've seen a lot of activity driven by is parent companies maybe refocusing their strategy on particular markets or particular lines of business.

So if you're a company that you want to focus on, for example, P&C insurance, and you have a life entity, you may decide then it's a good time for you to divest of, say, capital intensive life business, and refocus then on your P&C book. Sometimes this is driven by internal analysis, but as well, we've seen external investor pressure on management also to dispose of noncore businesses. This has driven a lot of activity globally.

For example, a good example would be Aviva, that has divested from a number of geographies over the last couple of years to refocus on their core business. So if you are not seeing returns from a certain geography or line of business and are struggling maybe to establish market share, then M&A could be a useful tool for you. Then, opportunistically, the appetite there has been very high from buyers.

If you're considering divesting and you see similar deals happening in the market, it may, given the level of demand that's there, may be good time for you to cash in on a less core asset if the pricing in the market is good. And keeping an eye on the market and the prices achieved then by other transactions should be an important thing that all senior management functions are looking at.

MATT FACEY: Perfect, yeah. I guess just talking about the value and the cost to the business then, if I throw a question out to you, Roshail, how would I find out the value of my business at that point?

ROSHAIL KHALID: So I wouldn't go into very much technical detail, but the most commonly used approaches that quite a few players in the market use are embedded value and appraisal values. So embedded value is usually used where the business has run off, and if there's expectation of good amount of new business in the future, then appraisal value approaches are quite common. We have seen quite a few variants becoming popular, market concession embedded value is one of those.

In European markets, we have seen operating capital generation approach as well. So in this approach, it's on a real-world basis, where the company looks at the release of capital and the margin in the business. And ultimately these margin then release in capital drive the dividends to the shareholders. So it's ultimately, if you talk about these approaches, most of them are about the future dividends or the payout to the shareholders.

The value of those divisions are calculated in terms of the present value. And sometimes the value of intangibles is undermined during the valuation process. So there are quite a few methods of valuing the intangible like goodwill and patents which we have been working on and which have worked in the past. So we have got a few experts, who are a team of experts, who have a special focus on the tangibles as well as intangibles.

DARRAGH MCHUGH: Yeah, that's right, Roshail. And maybe if I just jump in there, of course, there's formal ways of valuing business, whether it be embedded value or that operating capital generation that Roshail spoke about. But obviously a key thing, too, as well is around the level of interest and the competitive tension that a live process can bring. So I suppose having advisors that know the market, know the level of interest in there, and know the multiples of embedded value that are being achieved as well can help you to establish a range then around what might be a derived embedded value before you maybe make a decision whether to go to market with an asset.

MATT FACEY: When you talk about the assets and the embedded value then, how can a company ensure the top value for their business?

DARRAGH MCHUGH: Yeah, I mean, this is, I think, it's nearly the first question on everyone's minds when an M&A is kicking off is making sure that the deal maximizes the value for the shareholder, of course. So look, where there's capacity to do so, having a preparatory phase where, before the process, that can certainly pay dividends.

So we've worked with quite a few clients that are targeting a sale and have maybe gone through this type of process where they're implementing different actions, some in the short. Some might only take a short period of time. Some actually can take place over many years.

Some of these might include things like implementing an outsourcing arrangement, reducing your expenses, reducing headcount, re-insurance, some liability management program, basically some ways to try and clean up the business and make it as attractive as possible to a buyer. Even if you don't do that preparatory phase, even if you're just going straight to sale, one thing that we always say whenever we're working with buyers is it's critical to have a well-designed information pack for bidders and a well-established Virtual Data Room, or VDR. We've worked with a lot of buyers of insurance business across the globe.

So from doing that work then we know exactly what it is that they're looking for. So then, when we're on the sell side, what we try to do is we design then an information pack that allows those bidders to essentially take the material that's provided and plug it into their own deal pricing models. Obviously they need to do their own due diligence as well. What this tries to do then is to reduce that uncertainty for the buyer and ultimately then reduce or eliminate any potential haircuts that they might be applying in respect of uncertainty on the value, and therefore, increase the value for you as the seller. So they're probably two of the main things then that I would outline, so that preparatory phase, and then having a really well designed information pack for the buyer.

MATT FACEY: The other thing I had in probably my mind is the type of team that you would then bring to the table. I guess this is, how long is a piece of string, but what type of M&A team would I need if I'm selling my business?

DARRAGH MCHUGH: Yeah, again, this can vary on deal size. But for example, typically an investment bank, actuarial advice, legal, tax, HR, you may need advisors across all of those. Obviously I'm coming from an actuarial background, and the crucial thing from an actuarial perspective is having an M&A team that has a mixture of both people who know the business and the market really well, and also, M&A specialists who know how these processes work, know how to interface with bidders, know how to build those types of relationships.

What that really brings you then is you've got people who understand the business really well but also understand the process, too. I think, too, having independence is something that's often appreciated as well by clients. So typically when we're working on a deal we generally work one side of the deal, so either sales side or buy side.

And then, too, of course, having an internal team as well, having the right people brought into the circle early on in the process, I think, is crucial because once these processes start there they can be quite intense. There's a lot of Q&A, a lot of back and forth, so having the right people from your business involved and able to support, I think, is a crucial, crucial part of ensuring a successful process.

MATT FACEY: Yeah. Yeah, that sounds super interesting actually and quite difficult. But again, another how long is a piece of string question, but how long would it normally take to sell my book of business, or to buy a book of business?

DARRAGH MCHUGH: Yeah. I feel like we're giving a lot of answers here that are-- it depends. But of course it does depend. It depends on a lot of things where complexity, all the rest. If I was to set aside that preparatory phase that I spoke about earlier, and I'd say a relatively clean process, I think, it probably takes in the order of maybe six to nine months.

Maybe just to break that down a little bit further, you could be talking, maybe when you have that initial kickoff call, maybe three or four months then where you're getting all the material prepared, the actuaries are preparing an appraisal report, you're putting together a data room, you're putting together an information memorandum. So once that three or four months are up and you're ready to go live, and the data room opens, you're then talking maybe between another three to five months of a live process with the data room open, Q&A back and forth with bidders, and expert sessions, and management meetings. And then, at the end of that process you're getting a binding offer and then working towards closing.

So I think probably from that initial kickoff meeting to getting the binding offers in, six to nine months for something that's relatively clean. But again, I've seen things go on longer where there may be more complexities or issues involved with the process.

MATT FACEY: I guess just to give you a rest, Darragh, Roshail, just the next question to you is, how would I ensure that all my employees are taken care of during the acquisition?

ROSHAIL KHALID: So I think this question has two parts. I would like to split it in two parts. So first would be taking care of the employees during the M&A process, and the second would be taking care of the employee, or ensuring that the employees are employed after the M&A process.

So during the process the merger and acquisitions are usually treated as confidential projects, as you already know. Only a few employees are usually involved, and the company would be relying mainly on these employees for the calculations of whatever work is involved, and that's on top of their BAU, so business as usual. So we usually see like quite a few people stressed out during the M&A process, and this results in bottlenecks and stressful work conditions as well.

So for large players, we have seen that they usually have their in-house M&A experts which are responsible for the work. So it's not that big of an issue for large players. However, for a small or medium-sized company where there are no M&A experts, I think one way is to get an external expertise, something like a consultant maybe on accounting or external site.

So that would help the employees ease off a bit and it will give them a space to focus on the BAU as such. And moving on to the post-M&A process, so you must have seen that at many times employees leave the organization as soon as they hear about the acquisition, let it be portfolio transfer, merger, or the change in ownership of the company. So sometimes they are actually laid off but sometimes it's just the uncertainty or the resistance to change when the ownership changes, because the feeling is that the management will change, and ultimately they would be laid off. But that's not always the case.

So we have seen that regulators are often very concerned about the employees. And sometimes, like, for example, when I talk about UAE, since I've worked in UAE, as for my knowledge, the Central Bank of UAE often ask questions about what will happen to the employees after the ownership of the company changes, or the M&A happens, or, for example, the portfolio is transferred. So the companies are answering to the regulator, so we have seen some agreements between the companies, like the buyer and the seller both agree that the management of the company will stay and would not be laid off.

And sometimes there are no agreements, but still, we have seen that quite a few companies do not actually lay off the employees even after acquiring another company, for example. And you must be aware of a recent huge acquisition between -- GiG and AXA where no massive layoffs were seen, as such. So who's whosoever left the company is usually mainly because of the uncertainty but there were more massive layoffs in the market, as such, when that happened. So it's a combination of efforts from the regulator and the companies themselves to take care of the employees.

MATT FACEY: So again, you touched on a couple of companies there and a couple of regions actually. So when I log on every morning and I get my Middle East Insurance Review email there's a heck of a lot of activity in the M&A Middle East market. So just from your point of view, Roshail, why do you think there is so much activity in the Middle East in the M&A market at the minute, if you just want to touch on a couple of the main countries first?

ROSHAIL KHALID: Yeah, sure. In UAE, yes, you're right. There have been quite a few minutes and portfolio transfers in the past, and quite recently as well. So the UAE is a very small market, right? But if you see the companies operating in the market there, there are more than 60 companies which were operating in 2021, which is a lot in numbers, considering such a small market.

And interesting point is that around 20 companies out of those 60 were insolvent, and they were badly insolvent. They were struggling. Now there's a massive price pressure.

The margins are shrinking for the companies. The profits are reducing, especially for the smaller players. So the solvency is not expected to get better any time soon. So what we have seen is the regulators pushing these companies a lot to improve their solvency margins.

The shareholders do not want to invest or inject capital because the companies are not making profit. So ultimately, the companies are moving towards M&A because there's a massive pressure from the regulator to fix the solvency position of the companies. This is the first major factor I've seen.

The second one would be, I've seen quite a few international players who had the branch in Middle East have exited the market. And in order to exit the market you have to transfer the portfolio to the local player, so that is what they have done. Recently, quite a few, like three or four in the last one year, I've seen companies exiting, one or two years, I would say.

And if you see the situation in Saudi, the Kingdom of Saudi Arabia, is quite similar in terms of the regulatory pressure. It's exactly the same case. Quite a few small companies are operating. Regulator does not want many small companies but a few large ones with solvency strength.

But one thing that I feel is different in Saudi is that the regulator is actually incentivizing the consolidation of the companies by reducing the regulatory fee, for example. This is what I've heard from quite a few people around in the insurance market. So yes, both of these countries are actually going through many M&As. And especially in UAE, we are expecting a few more in the near future. Over to you, Darragh.

DARRAGH MCHUGH: Yeah. No, maybe just to talk a bit more generally, there's one big one at the minute, of course, is even just from a capacity point of view and team capacity. A lot of the teams that are involved in M&As, the actuarial teams have a lot on their plate at the minute with IFRS 17 and other stuff. So we've certainly seen that as being a challenging aspect to M&A processes as well.

More technically then, I guess one of the major things is trying to, I suppose, understand complex business in a short time frame. And that's what we hear from buyers all the time, whether it be P&C, life business in Europe or the Middle East is trying to get to terms with complex liabilities, understanding policyholder options, understanding how market movements may impact those options, and trying to do that in a relatively short time frame, where you have maybe a six or eight-week process. So that's obviously a big challenge for people. It's not insurmountable. That's where we tend to spend a lot of our time helping clients when we're in these processes.

MATT FACEY: Very cool. I think just as a final question to you both, because everything in the world these days is done in threes, so what are your top three things a CEO should consider when they're thinking about a potential M&A, so from a buy side and also from a sell side? So maybe Roshail, if you take buy side of things and then Darragh, take the sell side.

ROSHAIL KHALID: I think the first thing that CEO should consider is whether the company has an expertise on valuing the business, because it's quite a complex process and some of the companies may not have the right expertise. So it's very important to have a proper expertise both on the accounting, legal, and actuarial side so that an accurate, unbiased value of the company is determined. The second thing that the CEO should consider is the nature of business that has been written in the past, so it's especially relevant to long-term life business.

So I have seen quite a few companies writing endowment policies with a very high amount of guarantees in the past in Middle East market, and now the companies are struggling due to the low interest rate in the market. They are not able to fund the guarantees as such. So these companies, their main objective is to get rid of the portfolio now. So CEOs should be careful about not getting such portfolios because it's loss making.

And the third thing that should be considered by the CEO is whether the integration or merger would bring economies of scale to the companies or not. Because sometimes when you talk about two different companies merging together, it's not that easy to integrate. And sometimes the current administration processes that the company has may not be leveraged for the new products, for example, which they are acquiring. So rather than cost savings, it becomes quite cost incentive for the company to merge the portfolios into, for example, one administration system. I think these are the three main factors that I think CEO should consider.

DARRAGH MCHUGH: Maybe then if I'll jump in there on the sell side, so look, I think there's certainly overlap as well with the buy side. Often similar things need to be considered. But if I was to maybe pick the top three then for the sell side, I'd probably go with your team, the buyers, and the price.

We've spoken at length now about the team, both internal and external, making sure you have the right people involved and the right people involved early. Maybe just to focus on the other two, so the bidders and the pricing. Obviously it's extremely important for you to know what the value levers are in the business and what sort of pricing you should be targeting, and really understanding as well, when the bids come in how they are reflecting those value levers in their offer, so that if there are areas, then you can challenge that you're well equipped to do so.

And then as well, what's crucial really is having the right bidders involved. It's often good to have a number of bidders involved so you have that little bit of competitive tension there from a pricing perspective. But as well, it's critically important that you have execution certainty when you're running a deal.

M&A processes are-- they're not cheap. They do cost a lot of loss in of both people power and also just pure cost. So what you don't want to happen is that you arrive at the end of a process with a bidder who's then unable to execute because, for example, the regulator won't give them the authorization or something like that. So you do want a mix of them to make sure that you've got bidders that are involved to give you that competitive tension but also that are credible and can provide you with execution certainty as well.

MATT FACEY: Cool. Yeah, very good. Yeah. It's a complicated recipe, isn't it really, the M&A market, especially in the Middle East and further afield? What I'm hearing from both of you is that when you are going into the M&A world, is there a market or opportunity that makes this acquisition essential? Is it a compelling target? What is the size of the market, and does it fit with your current growth strategy?

And to what level can the business be grown? That's a big, big question when you're buying a company. And we do have to think about the people side of things, and what would your customers and competitors say to this business merging?

But it's all very, very interesting, and I think the market in the Middle East is hotting up. There are a lot more M&As happening, and this is something that is very interesting and can really help companies in the future. I just wanted to say a big thank you to you, Roshail, and to you, Darragh, for spending the time and talking with me today. And yeah, we'll speak again soon on (Re)Thinking podcast. Thanks, both.


ROSHAIL KHALID: Thank you, Matt. It was a pleasure. Thank you.


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