2020 insurance M&A outlook
Pursuing growth amid uncertainty
An uncertain economy and fluctuating financial markets marked a year filled with uncertainty, but strong opportunities remain for insurance M&A. Organizations will continue to pursue strategic insurance acquisitions to grow their product portfolio, expand their digital capabilities, and improve customer experiences and their bottom line.
What’s ahead: Insurance M&A deals may hit pause
In the year ahead, insurance companies contemplating M&A are expected to move cautiously. Economic, interest rate, and financial market uncertainty, along with the upcoming presidential election, are among the headwinds that may slow activity in the market. However, companies will continue to view alliances, investments, and acquisitions as attractive options when market factors make organic growth more difficult.
In 2019, insurance M&A aggregate deal volume was expected to remain consistent with the strong activity that took place in the previous year. However, deal volume, aggregate deal value, and average deal value varied by sector, with property and casualty, plus life and health, seeing declines. These results were possibly influenced by the lack of alignment between buyers and sellers and an increased focus on organic growth. Yet it was a record year for InsurTech investments; while new startup launches have slowed, funding continues to flow to support more proven players.
2020 insurance M&A volume and value levels may be similar to those of 2019, especially if the projected economic downturn gets pushed further out or if the political landscape stabilizes in the second half of the year. Organizations seeking targets that are accretive, synergistic, and consistent with their overall strategy should be favorably positioned to optimize M&A opportunities to boost their bottom line, broaden their product portfolio and/or geographic reach, get closer to the customer via digital technologies, and solidify their competitive positioning.
2020 insurance M&A drivers and trends
Insurance company executives who are considering opportunities to buy, sell, or partner in 2020 should consider these six trends that will influence the insurance M&A outlook..
In the current lower-interest-rate environment, insurance companies are finding it challenging to make money out of their investment portfolio. As a result, they are focusing on underwriting; policy terms and conditions are becoming stricter, and policy costs are going up to maintain profitability. Companies are assessing their product portfolios to determine what is core and what’s not; forward-thinking organizations are using M&A to reset, reorganize, and optimize their portfolios to strengthen their future competitive positioning.
Improving the customer experience
Consumer expectations are shifting as they apply their experiences with other sectors—like online retail—to insurance. In an age of immediacy, constant change, and overwhelming choice, insurance companies are looking to offer relevant products and services and to create a more desirable customer experience. While some companies are investing in digital capabilities, others are turning to M&A to help them get closer to the customer and create an improved, end-to-end experience. Others are forging alliances with customer service startups and InsurTechs to access new opportunities.
Maturing InsurTech market
InsurTechs are quickly becoming part of the insurance industry’s overall innovation ecosystem. They perform two broad sets of capabilities: Enabling solutions that help solve issues and pain points that carriers have, and disruptive solutions that InsurTechs say perform traditional functions better than incumbents. In spite of brisk funding, InsurTechs have not gained a meaningful share of the market in terms of premiums written. Meanwhile, insurance companies looking to streamline legacy processes and introduce innovations should consider collaborating with or even acquiring InsurTechs to benefit from their entrepreneurial culture and technical expertise. InsurTechs can benefit as well by taking advantage of established players’ market expertise, capital, and brand recognition.
Most insurance companies are committed to pursuing M&A as an avenue for growth; however, they are less convinced of the benefits they have achieved from past transactions. Post-deal integration is increasingly recognized as critical to achieving expected synergies; buyers are looking at integration strategies much earlier in the acquisition process. Not all acquirers develop an integration strategy blueprint for the organization in the pre-deal phase, but they typically incorporate a synergy case to underpin higher values. Once the M&A transaction is completed, it is a must to continue to work towards total integration to maximize synergies and deal value.
Accelerating insurance innovation
Lack of innovation is one reason why US life insurers have generally been struggling to grow. Most focus on enhancing legacy systems and products versus developing disruptive, differentiating innovations. Companies should consider a better balance between status quo improvements and bigger-picture investments, with longer-term efforts dedicated to creating new products, services, and customer experiences to spur growth. To help jump-start innovation, insurance companies should start dealing with InsurTech startups as an ecosystem of codevelopers and partners, rather than competitors or vendors. These startups are more likely to exhibit the technological expertise, entrepreneurial spirit, and out-of-the-box thinking many insurers may lack.
Accounting, regulatory and tax influences on M&A activity
The pro-business regulatory and tax environment that has supported insurance industry M&A in 2019 should extend into the new year; however, building macro-uncertainty around global economic conditions and the US presidential election may temper some companies’ enthusiasm for dealmaking, especially during the second half of the year.
Moving forward on 2020 insurance M&A opportunities
Disruption tends to create M&A opportunities, and we expect that to be the case in 2020. If a company pursuing a growth strategy amid today’s volatile conditions can’t get there organically, there are ways to get there inorganically through acquisitions, mergers, alliances, disposals, and investments. Deloitte’s survey of insurance industry executives found that more than half expect to complete an M&A transaction in the next two years. As they move forward in 2020, insurance organizations looking to optimize M&A opportunities should:
- Define and “mirror up” the overall corporate growth strategy and the M&A strategy. Determine whether the company can get to its desired future state on its own or if it needs to acquire a capability, technology, or book of business.
- Define the company’s appetite and develop or enhance capabilities so it can react quickly when M&A opportunities arise. Verify access to capital, develop an M&A playbook, and organize a team of internal and external advisers.
- For buyers, be selective about which properties to pursue. Be proactive about contacting targets, establishing executive-level relationships, and stating interest in a potential deal.
- For sellers, develop a very specific view of the company’s value proposition beyond financials to differentiate in an auction.
- Be aware of the changing tax and regulatory landscape’s potential impact on both domestic and global deals.
- Look beyond direct competitors or suppliers for M&A and into digital and value-chain adjacencies.