Insurance, insurtech M&A activity not slowing down

The frantic pace of insurance industry M&A activity that emerged in 2021 shows no signs of slowing down, as firms look to expand their operations and take advantage of new growth opportunities in a variety of areas.

In a recent report on the 2022 insurance M&A outlook, consulting firm Deloitte said the total deal volume across underwriters and brokers increased 40% year over year through the end of 2021—869 deals compared with 620 in 2020. The aggregate deal value jumped 165%, to $57.5 billion in 2021 from $21.6 billion in 2020.

Signs point to 2022 being another strong year for M&A deals in the industry, the firm said. “Strategic investors have ample available capital, the stock market appears to be supportive, and there are few anticipated economic, regulatory, or tax headwinds,” the report said.

M&A activity will continue to remain active not only this year but likely into 2023 as well, says Ernst Renner, partner and head of U.S. insurance at Capco, a global technology and management consultancy specializing in the financial services industry.

Carriers will look to expand or extend distribution, explore opportunities for investment growth, aim for product diversity, and go after businesses such as specialty firms such as insurtechs, Renner says.

“There will be continued activity from the private equity market most certainly,” Renner says. “The intent is to manage the portfolio with a higher degree of investment rigor. On the brokerage side of insurance, consolidation will continue between brokers, but also driven by [private equity] firms looking to round out portfolios.”

The concurrence—and turbulence—of slowly rising interest rates and rising inflation “will be a wild card in the year to come,” Renner says. “Higher interest rates frees cash flow and allows for the ability to work strategically and execute on an inorganic growth strategy.”

Rising inflation will put a burden on organizations overall via costs to satisfy claims as well as retaining or attracting personnel, Renner says. “However, in P&C where premiums were already on the rise, inflation will harden the cost to consumers, as there’s not much room to shop around,” he says. “This will be a balancing act, but I would still say [M&A] activity will be rigorous this year.”

The life and annuity portion of the market led the underwriter field in terms of the number of 2021 M&A deals, Deloitte said, “as sustained low-interest rates hobbled profitability of interest-rate-sensitive products and numerous insurers pursued inorganic sources of growth.”

Cross-border M&A activity should contribute to 2022 deal totals, particularly in specialty insurance segments, the firm said. Potential insurance industry M&A impediments include high valuations and a demand-supply imbalance for sought-after products and capabilities, it said, but these are not likely to be deal-breakers.

Based on a survey Deloitte conducted of insurance finance executives in 2021, these executives expect more active M&A this year. Expanding geographic reach was the leading motivating factor among respondents, followed by increasing scale and adding new technology capabilities.

“The deal marketplace is replete with abundant capital and willing buyers for asset classes that provide a rate of return commensurate with the risk, even though the competition for high-value targets may be fierce and inflationary concerns may complicate the valuation process,” the Deloitte report noted. “Both factors are likely to drive up prices—potential buyers in 2022 should be prepared to write a big check relative to the opportunity.”

Given the current economic and regulatory environment, “many companies are refining their strategies, looking to drive greater returns on capital or manage their risks more effectively,” says John Carroll, senior vice president and head of insurance and annuities at LIMRA, LOMA & LL Global, a research, consulting and professional development not-for-profit trade association.

In 2021, there were many ways for companies to achieve those objectives through transactions, “especially given the extraordinary amounts of capital available in the market,” Carroll says. “These deals also open up opportunities for companies to leverage scale to become more competitive or focus their attention on white space in the market.”

Some of the recent M&A deals are particularly important in terms of signaling a growing trend for the industry, Carroll says.

This includes Blackstone’s purchase of Allstate’s Life and Annuity businesses for $4 billion and its deal to buy a 9.9% equity stake in AIG’s Life & Retirement business and manage an initial $50 billion of Life & Retirement’s existing investment portfolio. “Blackstone continues a trend of asset management firms entering into the insurance space, including the deal between Apollo Global Management Inc. and Athene Holding Ltd.,” Carroll says.

Another is Empower Retirement’s agreement to acquire the full-service retirement business of Prudential Financial Inc., which follows its acquisition of Mass Mutual’s retirement business and its deal with Fifth and Third to take on its retirement business.

“There is so much opportunity in the retirement business, and that will only grow as the number of retirees grows,” Carroll says.

LIMRA estimates the number of retirees will grow 71 million by 2030. “Today, retirees and pre-retirees hold $34 trillion in assets,” Carroll says. “I think there may be continued consolidation in the institutional retirement market. But we expect greater opportunities in the guaranteed income space as newer retirees, who don’t have a DB [defined benefit] plan, seek to establish a guaranteed income stream derived from their retirement assets.” This might drive more M&A activity in the retail retirement sector, he says.

LL Global expects strong insurance M&A activity to continue in 2022. According to its recent Global Insurance Executive Survey, nearly one in five companies are considering M&A opportunities or closed block transactions and reinsurance agreements to mitigate risk and bolster their financial position, Caroll says.

“In addition, we know that [private equity] firms and other insurers, reinsurers and asset managers are looking for opportunities to enter or expand their position in the insurance market,” Carroll says. “Considering the record levels of deployable capital, we expect competition for insurance carrier targets and run-off blocks to remain strong.”

Business consulting firm McKinsey & Co. says insurers need systematic capabilities to support programmatic deal-making, and that a good place to start is with an effective M&A blueprint.

“At its core, programmatic M&A is not a volume play; it’s a strategy for systematically acquiring small to midsize businesses, services, and capabilities and for effectively integrating them as new businesses or capabilities,” the firm stated in a report.

“Companies that adopt this approach to deal-making, including a select group of insurers in both the life and property and casualty [P&C] sectors, have generated superior excess TSR [total shareholder return] by focusing on a series of smaller acquisitions to diversify product offerings or add new capabilities—rather than traditional financial-sector M&A goals that emphasize building scale,” the report said.

Deal-making in the insurance sector is likely to be “brisk” in the coming years, McKinsey said, as insurers look to grow and diversify their earnings. Life insurers face ongoing challenges to sustaining growth in core life and annuity businesses; and they also remain focused on improving return on equity (ROE) profiles by divesting or reinsuring legacy blocks.

P&C carriers “are likely to seek bolt-on deals of companies that enhance their presence in growth markets and offer attractive cross-cycle ROE,” the firm said. Without a developed M&A blueprint, however, insurers are more likely to pursue ad hoc synergies around each target with hit-or-miss returns. “A robust M&A blueprint addresses where, why, and how a company will undertake a systematic program of acquisition,” it said. “It lays out well-defined themes and criteria that are explicitly grounded in strategy, builds conviction and alignment of stakeholders, and sets clear boundaries and integration plans.”