Even as the world grapples with the COVID-19 pandemic, Deloitte is seeing a continuing increase in mergers and acquisitions for most insurance sectors.
In its 2021 Insurance M&A Outlook, the company noted that the number of insurance deals for 2021 to date is up by 18%, aggregate deal value is about four times higher than in 2020, life and annuity activity is up from five to 17 deals, and broker transactions remain strong.
“We expect insurance M&A activity to continue to increase as companies look for ways to grow inorganically,” said Mark Purowitz, principal with Deloitte Consulting, and global co-lead of Insurance M&A. “We are seeing evidence of companies going outside their core insurance products and looking to acquire various entities in an effort to offer greater value to customers, including utilizing alliances, partnerships and joint ventures.”
As insurance executives move forward with their M&A growth plans, they should consider how to address the following four trends, according to the report:
- Strategic growth
- Accelerating digitization
- The strong influence of private equity investors
- Potential tax implications
Achieving Strategic Growth
As noted by Deloitte earlier this year, M&A is continuing to play a critical role as insurance companies figure out how to move from recovery mode to thriving in the next normal, where deals are likely to be more strategic than opportunistic.
As companies realign their strategic interest, some of the restructuring is being driven by management’s desire to move from a broad platform to a more focused business model, according to the report.
The company is starting to see evidence of its prediction that companies are evaluating their business models around core versus noncore, and this portfolio rebalancing is likely to bolster market supply for future deal-making. Deloitte also expects to see the mutual holding company structure continue to gain popularity this year, and moving forward, particularly among regional P&C companies, to create more options for capital deployment and strategic expansion.
The Role Of Technology
Technology will likely be key to industry transformation, as insurtechs continue to be desirable investment vehicles, partners, and acquisitions in 2021, the report noted. Certain U.S. states are actively promoting insurtech development by tweaking regulations so that new technology offerings can be developed.
This may encourage greater collaboration between the startup community and insurance carriers in bringing broader solutions to market. Technology also continues to be a way for insurance companies to acquire much needed digital capabilities, as well as complement their existing products and offer multiple services.
Influence Of Private Equity
In the past, private equity investors have mainly focused on brokerage, the report pointed out. However, several companies have demonstrated that having life and annuity platforms that drive assets under management and fee-based income can be a driver of M&A activity, as has occurred in the past 12 months.
As Deloitte mentioned in its previous report, by some estimates, PE firms have a combined $2.5 trillion worth of “dry powder” ready to be deployed on insurance M&A opportunities. Already active in the distribution space, almost 60% of the brokerage deal volume in the first six months of 2021 was driven by PEs.
Potential Tax Implications
With potential changes in the U.S. tax landscape on the horizon, insurance companies may want to strategically think through the potential tax implications of 2021 M&A transactions, both in the U.S. and in other jurisdictions, the report noted.
Because of the prospect of potential tax reform and changes to corporate rates and global minimum tax, right now, insurers are focusing on modeling “what-if” scenarios. Obviously, the report added, there is the potential of multinational restructuring but many companies are on hold until they receive more clarity on tax reform and global tax requirements.
But in traditional low- or no-tax jurisdictions, such as Ireland and Bermuda, and in insurance hubs, Deloitte expects to see M&A affected. Depending on what happens, there could be a redeployment of capital.
The Big Takeaway
As company leaders strategize on how to thrive in the next normal, they are considering a broader definition of M&A to include acquisitions, dispositions, alliances, partnerships, ecosystems and investments that can help them enhance their portfolios, enter more profitable market segments, and accelerate the shift to digital operating models.
According to the report, the big takeaway from 2021 so far is: We don’t expect activity to slow down anytime soon.
To take advantage of this continued growth, company leaders should evaluate their businesses in terms of core vs noncore that drive optimal use and return of capital, Purowitz said. In defining growth strategies, it will be important to determine organic vs organic options and then translate that into a specific M&A strategy enabling more focused target identification.
As CEOs continue to examine how M&A can help safeguard future enterprise value by establishing more resilience in what they do today, it offers them ways to strategically consider options to extend, expand, and move into new markets.
Ayo Mseka has more than 30 years of experience reporting on the financial-services industry. She formerly served as Editor-In-Chief of NAIFA’s Advisor Today magazine. Contact her at [email protected]