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Insurance M&A Activity Rebounds

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What You Need to Know

  • Private equity-owned brokerage firm consolidators are out shopping.
  • Low rates are squeezing life and annuity issuers.
  • Tech keeps changing everything.

In the immediate aftermath of the COVID-19 lockdowns in early 2020, M&A activity in the insurance industry dropped off as deals were put on “pause” while potential buyers waited to see how the pandemic would affect the availability of capital, target company values, and the ability of the parties and service providers to carry on with the acquisition process.

By the second half of 2020, it had become apparent that the factors previously driving insurance industry M&A were continuing unabated, and, in some cases, such as the digital transformation of insurance, were being accelerated by the pandemic. The last half of 2020 saw a rally resulting in the highest deal volume for comparable periods in the past several years.

In late 2020, many analysts predicted an acceleration of insurance industry M&A activity through 2021. With the first half of 2021 behind us, we have seen those predictions bear out with both a high number of transactions and high aggregate transaction values across the insurance industry.

The Reasons

Here are four of the key factors driving this high level of M&A activity.

1. Consolidation in the Brokerage Industry

A large percentage of the recent transaction volume is driven by ongoing consolidation in the brokerage industry, where private equity backed aggregators are rolling up independent brokers, thereby gaining economies of scale and greater leverage to negotiate commissions.

2. Persistent Low Interest Rates

In the life and annuities sector, where the persistent low interest rate environment is putting pressure on company profitability, many carriers are looking to divest unprofitable product lines. On the buy side, private equity firms and money managers are looking to add to their assets under management by acquiring closed books, often through offshore reinsurance transactions which take advantage of the greater regulatory flexibility found in non-U.S. jurisdictions.

3. Strategic Acquisitions and Carve Outs of Noncore Business

While traditional M&A drivers such as increasing geographic scope, accessing new distribution channels, diversifying product offerings, adding operational capabilities, and achieving economies of scale continue to drive M&A activity, many insurance companies have reevaluated their growth strategies. Many companies have elected to shift their strategic focus to narrower and deeper product offerings in their core business lines.

This strategic shift has been coupled with record high levels of capital and surplus across the industry and a low interest rate environment, resulting in many companies choosing to deploy some of that capital on acquisitions rather than traditional passive investments.

These drivers have led to an active market for strategic acquisitions and roll-ups as companies seek to grow more quickly and in a more directed manner than could be accomplished through organic growth.

Some carriers are also adding specialty lines and non-insurance products to address the full array of customer needs in a given area such as health and wellness, financial well-being, or safety and security.

At the same time, many carriers are proactively carving out noncore business units and redeploying the sales proceeds in core businesses where they have a better opportunity to outcompete. In the current competitive M&A environment, sellers of these divested business units are commonly able to sell into a competitive auction process on highly seller friendly terms.

4. Digital Transformation of Insurance Industry

The ongoing digital transformation of the insurance industry is putting pressure on carriers to deploy advanced technologies to remain competitive. New technologies are transforming all phases of operations, from distribution and onboarding platforms, underwriting and risk assessment, claims administration, payment processing, and benefit and service management. Companies must decide whether to “build or buy” these technologies, and in many cases choose to buy.

Rather than acquiring point solutions through a licensing or third-party development arrangement, many carriers are looking for an opportunity to acquire a development team with the ability to continually add disruptive technologies to their operations. Insurtech startups, backed by years of steady venture capital investment, make attractive acquisition targets for these companies, in spite of the challenges that can arise in the integration of cultures and business practices of a small insurtech company with a large insurance carrier.

Whether the decision is to build or buy, the ongoing cost of technology acquisition and development is motivating companies to seek more volume across which to leverage these costs. Some small to mid-sized companies are reluctantly reaching the conclusion that they simply don’t have enough volume to justify the expense of staying competitive, and are therefore looking to combine with a larger company.

For some carriers, the specter of decreased premium revenue and efforts to reduce claims are factors motivating technology acquisitions.

The COVID-19 pandemic has, in many ways, accelerated and solidified the need for digital and technology based solutions. Pressure from consumers and agents to do business online or on mobile devices and the migration to a remote workforce have put carriers that have invested in advanced information technology systems in a better position to maintain seamless operations than those that have been unable to keep pace with technological change.

What It All Means

While there are many factors that could depress the market’s appetite for insurance M&A in the latter half of 2021 and beyond, the pressure to keep up with the ongoing digital transformation of the industry is likely to continue to drive deals. Likewise, the trend for carriers to seek focused growth through acquisitions or other inorganic strategies, while at the same time divesting noncore businesses, appears likely to continue for the foreseeable future.

(Image: Sergey Nivens/Shutterstock)

Fountain pen (Image: iStock)Anne Ross and Maureen Easton are partners at Foley & Lardner LLP.