Several factors are pointing to 2019 being another solid year for mergers and acquisitions across the insurance industry, a Deloitte report concluded.
Deloitte's annual M&A Outlook recorded 681 transactions in 2018 across the insurance sector, up from 621 deals in 2017. This surge include an 11 percent jump in insurance broker transactions (537 to 594) and a 15 percent increase in property/casualty deals (53 to 61).
The immediate outlook is for more of the same, Mark Purowitz, principal and M&A leader with Deloitte, told InsuranceNewsNet.
"Insurance companies are finally starting to figure out that they don’t have to build everything themselves, so they’re going to buy capability," he explained. "We’ve already seen a handful of those acquisitions over the last few years by insurance companies who have invested in insurtechs."
The appetite for insurtech capability is one of the "five buckets" that Deloitte authors separate potential 2019 M&A drivers. The continued creation of venture capital funds, some within insurance companies, along with the healthy number of viable insurtech targets makes this a ripe area for M&A activity, the report stated.
The other four buckets are:
- Cross-border deals. There is plenty of interest in cross-ownership from major insurers, Purowitz said, as well those who want to be major insurers.
"I think we’ll see more from the Japanese into the U.S. as they look for more strategic buys and platform plays," he said. "They buy an asset here to get into the market and learn, and then they use that asset to expand. ... I think there’s going to be more interest from the European players who need to be in the U.S. to be considered a global player."
2. Middle market match-ups. Middle-market insurers, those Deloitte identifies as between $500 million and $2 billion in size, are being squeezed as InsurTechs change the customer relationship dynamic.
Many of these companies are looking around for partnership possibilities, Deloitte said. Many of them are mutual insurance companies seeking new structures to give them more flexibility.
"The mutuals are starting to feel a tremendous amount of pressure for the first time," Purowitz said. "And they’re struggling to keep up with the technological advances, their balance sheets and their ability to spend. And they’re struggling for relevance because they were founded on this concept of community trust and the younger generation’s definition of trust is very different."
3. Portfolio optimization. "Small-to-medium companies operating in the fragmented personal lines insurance market may pursue acquisitions to diversify into the small commercial insurance space," the Deloitte report reads.
The Chicago-based Kemper Corp.’s $1.6 billion purchase of Infinity Property & Casualty Corp. in July 2018 is a perfect example, the report said. Kemper companies offer insurance for home, auto, life, health and valuables, while Infinity sells auto insurance in the specialty, nonstandard automotive segment.
"The combined company will have a more diversified portfolio across auto, home, life and health insurance," the report concluded.
4. Private equity participation. With plenty of money in play, private equity firms such as Apollo Global are in the market, and insurance entities are always attractive buys, Deloitte said.
"In doing so they gain access to a stable business model, premium income, investable assets and capital, and a good source of short-term earnings, especially for asset-intensive lines like run-off insurance," the report said.
'Top Of Mind'
While regulatory barriers to M&A continue to fall, insurers would do well to keep regulatory concerns "top of mind" in 2019, the Deloitte report indicated. It's no surprise that annuity and life insurance sales standards are regulatory issue No. 1.
"Perhaps the single biggest discussion item related to market conduct thus far has been the possible creation of new, higher sales standards for annuity and life insurance," the report stated. "Regulators have been moving toward consensus that a 'best interest' standard might be appropriate for annuity sales, and the state of New York has already issued regulations."
Likewise, cybersecurity and data privacy concerns continue to dominate regulatory discussions all the way to the international stage.
In the grand scheme, however, 2019 is expected to provide a continued opening for strong M&A activity between regulatory campaigns.
"The current regulatory environment appears more settled compared to the recent past and, absent a significant unexpected event, we see little prospect of major new regulation in 2019, especially in relation to bank and insurance capital," Deloitte concluded.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at email@example.com.
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