Despite a sharp decline in M&A activity in 2019 and continuing economic uncertainty, more than half of the executives surveyed by Deloitte still expect to complete an M&A transaction in the next two years.
Carriers still view alliances, investments and acquisitions as attractive options to help grow their product portfolio, expand their digital capabilities, and improve customer experiences and their bottom line, according to Deloitte’s 2020 Insurance M&A Outlook. However, potential buyers are more likely to make a number of smaller deals to address specific needs than to apply a majority of their resources against one large, cure-all deal, Deloitte said.
There were 38 P/C insurer M&As in 2019, a decrease of 38 percent from 2018. The aggregate value of those deals was $5.8 billion, a sharp decline (83 percent) from $34.1 billion the previous year. There was also a sharp decrease in deals above $1 billion, with only two announced in 2019 compared with eight in the same period of 2018.
Deloitte said the decline in deal number and value was driven, in part, by hardening rates in the sector, which has caused carriers to concentrate on organic growth. Additionally, industry leaders said there was a lack of alignment between sellers and buyers in 2019, as the sellers expected to receive deal premiums based on 2018 experience, when the organic growth opportunities were low. Deloitte expects that 2020 insurance M&A results will be similar, especially if the projected economic downturn gets pushed further out or the political landscape stabilizes in the second half of the year.
Among the year’s notable deals, Tokio Marine Holdings agreed to buy U.S. high-net-worth insurer Privilege Underwriters and its specialty insurance subsidiaries, known as Pure Group, for $3.1 billion, and American Family Insurance acquired Ameriprise Auto & Home for $1.1 billion.
Global investment in InsurTechs continued to surge through the first three quarters of 2019, setting a record of $3.26 billion with a full quarter still to go. Insurers only accounted for about a quarter of the investment, Deloitte said, with the majority coming from venture capital funds and other outside parties. While new startup launches have slowed, funding continues to flow to support more proven players, Deloitte noted.
Last year saw two major deals where carriers acquired InsurTechs: Prudential Insurance’s acquisition of online insurance startup Assurance IQ for $2.35 billion and Aon’s announced acquisition of CoverWallet for close to $300 million.
Among Deloitte’s advice for insurers considering M&A in 2020:
- Assess product and service portfolios to determine what’s core and what’s not, what’s performing well and what’s not, and whether investments are working hard and delivering expected value. Acquisitions and alliances can help carriers diversify their product and customer base, expand their market footprint, and gain scale.
- Traditional insurers looking to both streamline legacy processes and introduce disruptive innovations that might differentiate them in an increasingly customer-centric economy should consider collaborating with or even acquiring InsurTechs. These startups are more likely to exhibit the technological expertise, entrepreneurial spirit and out-of-the-box thinking many insurers may lack.
- Insurers need to focus more on post-deal integration if they want to maximum value from M&A. It’s not all about financial due diligence. Insurers must also consider: Will the acquisition be absorbed into the larger organization or be left alone to run itself? What organizational and operating model changes may be needed to accommodate new people, processes and technologies? How can the newly combined company retain top talent and develop a culture conducive to growth?
- Insurers must be aware of regulatory actions, such as the California Consumer Privacy Act (CCPA), which became effective Jan. 1, 2020. Though CCPA is the first major piece of data privacy legislation in the United States, carriers should be prepared for other potential state-level privacy regulations. Insurers need to know exactly where data about specific consumers is stored, how complete and accurate it is, and how it is used and protected. Maintaining vigilance is particularly critical during post-deal integration, when records for existing and newly acquired customers may be merged in a central repository.
- U.S. insurers are still struggling with implementing provisions of the 2017 Tax Act, and the 2020 elections could lead to another round of substantial tax changes. Carriers should monitor relevant legislative developments, continue to review changes to their tax profiles and strategically think through tax opportunities in relationship to potential M&A transactions—both in the United States and other jurisdictions.
See the full Deloitte report: “2020 Insurance M&A Outlook: Pursuing Growth Amid Uncertainty.”