Size no longer matters in the insurance world as many insurers are streamlining operations so their core operations can take full advantage of any economic recovery.
Evidence of this scaling down is everywhere. American International Group, for example, is offloading 19.9% of its life and retirement business. The move will enable AIG to focus primarily on its profitable property/casualty business, a move that high-profile investors have recommended for months.
It is part of a larger trend in financial services, explained Mark Purowtiz, principal with Deloitte Consulting. Whereas companies once wanted to be a one-stop shop for financial products, the reality is not supporting that concept.
"Over the course of the last 25 years or so, the marketplace didn't respond in the way that these companies thought of in terms of buying decisions," he said, "and the way that bundling products and services would be bought in a certain way."
Deloitte recently released its 2021 insurance M&A outlook, which “examines trends over the past several years and identifies key expectations and challenges for 2021 that may help insurance executives pinpoint M&A drivers and plan their strategy accordingly.”
Four Factors Driving M&A
Deloitte identified four trends influencing insurance M&A activity in 2021. They are:
Capitalizing on carve-outs. AIG is hardly the only company seeking to carve up its portfolio. Many annuity-focused insurers are flirting with private equity investment as a means to stabilize books and improve profitability.
Insurers generally allocate their funds to investment grade long-term bonds, which are performing poorly in an extended low-interest-rate environment. A private equity deal offers insurers two things: reliable and better investment return, and a permanent capital injection.
A Deloitte survey of executives found that, in pursuit of financial stability, divesting nonperforming or noncore operations was cited by 36% of North American executives, 22% of European executives, and 30% of Asia Pacific executives.
Accelerating digitization. The COVID-19 pandemic forced many insurers to go full digital to do business and survive. It also exposed those insurers who were not ready for the new digital world.
Seventy-nine percent of insurance executives agreed that the pandemic exposed shortcomings in their company’s digital capabilities and transformation plans, Deloitte found. In response, 95% of those surveyed are already accelerating or looking to speed up digital transformation to maintain resilience.
"Insurance companies felt the need and the pressure to at least keep up with what's going on," Purowitz said. "There has been a lot of lagging investment in general modernization that then enables a lot of the new things that they want."
The urgency to act — partly in response to pandemic-spawned disruption — is accelerating organizations’ efforts to deliver within the coming year what might originally have been three- to five-year transformation plans. Among survey respondents, investment priorities include cybersecurity (66%), cloud computing (59%), data privacy (53%) and data analytics (49%).
Accounting, regulatory and tax influences. There are a number of potential disruptions looming on the tax and regulatory front. Some, or all, of them are likely to spark further M&A activity as insurers rush to beat deadlines and spread risk around, Deloitte concluded.
State and federal regulations include cybersecurity laws and new best-interest standards being passed in many states.
Nontraditional considerations for inorganic opportunities. As the insurance industry goes through a period of mass disruption from a variety of sources, M&A should continue to thrive, the Deloitte researchers wrote.
The M&A action breaks down to "offensive" and "defensive" deals, Deloitte explained. In the former, insurers will be looking to exploit opportunities for dealmaking growth.
Insurers are using a defensive M&A strategy to cut losses or spread out risk until, for example, the economy recovers.
"We expect companies to deploy defensible M&A strategies to strengthen their capabilities and market posture in order to maintain competitive positioning coming out of the pandemic," the Deloitte report stated.
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 protected]. Follow him on Twitter @INNJohnH.
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