Mergers and acquisitions (M&A) in insurance are thriving on the back of macro factors – low interest rates, pandemic-related impacts and deepening specialization. For instance, in life and annuities, equity and reinsurance deals are far from abating, with price competition among reinsurers creating a seller’s market. The rush to add digital capabilities in response to changing customer expectations, is spurring investments. In the EY-2021 Digital Investment Index, global FIs reported that the M&A route to augment digital capabilities surpassed ROI expectations 52% of the time versus 45% and 31% for partnerships and in-house initiatives.
Insurance bagged more than half of PE deals in financial services, piggybacking on a renewed interest in balance-sheet investments. Compared to the outlook at year-end 2020, global M&A activity in H1 2021 dipped to 197 deals against 201 in 2020. Activity was up 7.3% and 2.0% in the Americas and Europe, but down elsewhere.
Strategic buyers of insurance assets are eyeing several M&A opportunities. Growing private equity interest and restructuring of large carrier portfolios are enticing buyers. In this milieu, the Aon-WTW merger call-off due to antitrust concerns raises caution for mega deals, but M&A activity is otherwise expected to remain healthy.
Within distribution, investors are focused on the brokerage space and targeting adjacent or riskier asset classes, such as nonstandard auto agencies or MGAs focused on cyber insurance. The same principles for targeting adjacent and riskier spaces hold true for services businesses. One claims-services provider has made a dozen acquisitions to deepen its expertise in one adjacent service, while broadening its geographical reach and expanded insurance lines.
In a post-pandemic environment, consolidation, digitization and specialization strategies are swaying investor decisions and value-creation priorities.
- Consolidation
Distribution and services players have scale advantages. Larger distributors negotiate higher commissions on premium bases versus smaller agencies, just as larger services players offer wider breadth of solutions. Unsurprisingly, smaller insurers have generally consolidated outsourcing to work with a few players to address most of their needs, unlike larger ones that combine “best-of-breed” solutions. .
- Specialization
Investing in specialty carriers and brokers is proving to be a lucrative model for value creation. As data and insights fuel growth in underwriting specialty insurance and reinsurance, investment is shifting to vendors focused on complex emerging perils—including cyber, political, renewable, and environmental.
- Digitization
Digital distributors, that often struggle to control customer acquisition costs, are adding products and acquiring balance-sheet capabilities to expand their presence along the value chain. Once they gain momentum in specific customer segments, they offer additional products.
Recent M&A Activity
Two recent examples are Hazard Hub being acquired by Guidewire and Pie Insurance going full-stack with its acquisition of a carrier. HazardHub curates data to provide a nationwide catalog of risks likely to damage destroy property, including perils from air, water, earth and fire. HazardHub’s API provides risk scores and underlying information for US properties.
Guidewire Software recently acquired HazardHub, which is in use in 110+ organizations, including insurers, reinsurers, brokers, MGAs, and other insurtechs.
Pie Insurance is leveraging technology to sell affordable commercial insurance to small businesses. Pie’s focus on granular, sophisticated pricing and data-driven customer segmentation has enabled it to match price with risk accurately across a broad spectrum of small business types. It has received regulatory approval to acquire Western Select Insurance Company, a property casualty insurance company that is licensed in Illinois, California, and New York.
Technology has been an M&A deal catalyst, as well as a barrier. A seller without right and sufficient technology investment can be a deal breaker with potential acquirers wary of the need to spend millions. On the other hand, as illustrated by the Guidewire-HazardHub deal, insurtechs are turning to be both attractive as assets as well as potential acquirers and creators of insurance businesses.
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Source: https://dailyfintech.com/2021/09/02/the-themes-spurring-insurance-mergers-and-acquisitions/
