Like many aspects of the insurance industry, mergers-and-acquisitions activity is not at all where analysts expected coming into 2020 — thank COVID-19 for that.
But M&A will continue robustly, analysts predict. In fact, it will help shape how the industry recovers from the pandemic and reinvents itself.
“Most industries, including insurance, will need to reinvent themselves in order to thrive, and M&A activities are expected to have a strong influence in shaping the ‘next normal’ environment,” Deloitte said in its recent mid-year M&A report.
Prior to the pandemic, Deloitte had predicted insurers would pursue M&A activity in large numbers over the next two years.
“COVID-19 has forced many insurance carriers to hit pause on new M&A activities and focus on preserving capital,” the Deloitte report concluded.
Meanwhile, the property/casualty insurance price hardening in the U.S. commercial insurance sector should help carriers plot longer-term stability as the pandemic continues, Deloitte said.
During the first six months of 2020, there were 249 insurance M&A transactions versus 324 in the 2019 period, a decrease of more than 20%, Deloitte reported.
‘An Optimal Time’
Those price increases create what “may be an optimal time for carriers to reevaluate their product and service portfolio and plot the path of greatest organic growth,” the report said.
Mark Purowitz, principal with Deloitte Consulting, spoke to InsuranceNewsNet about several factors that are likely to influence M&A activities through 2021.
Portfolio optimization. COVID-19 has forced many insurance carriers to hit pause on new M&A activities and focus on preserving capital, Deloitte said. The ultra-low interest rate environment is making it very difficult for carriers to make money.
“There are a number of companies out there that are overweighted to annuities,” Purowitz said. “As a result, they’re looking for ways to de-risk their portfolios. And that’s where they have life blocks, group insurance blocks as a way of diversifying, earnings are helpful. As long as you’ve got scale to do that.”
Disruption “tends to create M&A opportunities, and we expect that to be the case in the second half of 2020 and in 2021,” the Deloitte report said.
For example, Jackson National Life struck a deal in June with Athene Holding to fully reinsure $27.6 billion of Jackson’s in-force book of fixed and fixed index annuity liabilities in exchange for approximately $1.25 billion in ceding commission.
Customer experience. There is good news and bad news in the pandemic impact on customer experience, and, by association, company values, Deloitte concluded. For starters, many insurers have ramped up the use of technology to make insurance more accessible.
However, the economic slowdown is taking incomes from millions of potential customers. Less income means fewer sales of insurance products.
“As a result, a carrier’s ability to retain existing customers will be an increasingly important driver of financial results,” the Deloitte report said.
Insurtech market. Deloitte predicts that carrier partnerships and investment in insurtech companies will pick up in 2021. The main reason is just the natural evolution of industry investment in insurtechs, Purowitz explained.
Insurers invested about $20 billion in insurtechs during the “first wave” of investment over the past six or seven years, he said. That was about concepts and ideas and research and development.
“The industry is starting to recognize which of these are more of a mature set of solutions and capabilities for them to use,” Purowitz said. As a result, they’re investing in continuing to expand and scale those.”
Insurance innovation. To survive and remain desirable companies, insurers will need to prove they can be nimble and carry on in whatever the pandemic and post-pandemic work environment looks like, Deloitte noted.
“The ability to perform tasks such as remote physical screenings and virtual claims will likely no longer be seen as a differentiator, but a required capability for operating in the market,” the report said. “Partnering or acquiring with other companies may be more efficient and less risky than building capabilities internally.”
Role of private equity. By some estimates, the private equity sector has approximately $2.5 trillion worth of dry powder ready to be deployed on opportunities, Deloitte said.
For life and annuity insurers in particular, “the average time period between the receipt of premiums and the payouts of claims can be many years, meaning that an insurer’s profitability will be driven in large measure by its success in investing the premiums it collects,” the Deloitte report said.
Private equity investors “may utilize their investment expertise to mitigate the effect of low interest rates and improve net spreads.”
Quick Rebound In 2010
As a point of comparison, the Deloitte report noted that insurance company M&A similarly dipped during 2009 as the full effects of the deep recession were felt. But the following year, in 2010, M&A data returned to pre-recession levels.
“Unprecedented times create opportunities—which may explain why M&A could play a critical role in post-pandemic business strategy,” the Deloitte report said.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.
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