The influences shaping future insurance M&A

The volume of mergers and acquisitions (M&A) in the insurance sector increased 10 percent in 2019 with 419 deals completed worldwide, up from 382 in 2018, according to Clyde & Co’s February 2020 Insurance Growth Report.  Key drivers of increased M&A activity are the increased prominence and use of technology, in particular big data, which allows insurers to price individuals more accurately. Shifting age demographics, both in Europe and Asia, are also impacting M&A decisions, not to mention the influence of uncertainty of geopolitics. The Americas continued to be the most active region according to Clyde & Co, with 182 deals in 2019. Latin America in particular is seen as a lucrative market with low insurance penetration and attractive interest rates.

Technology and product pricing

James Tye, partner at PWC, says: “Roughly half of the world's insurable risk is uninsured. And part of the reason for this is not having the right access to data to price risk properly.” The development of better pricing therefore has a strong link to the growth in technological innovation, as acquiring or developing technological expertise will become an increasingly important goal for M&A.

Big data in particular can provide  insurers with a vast pool of complex customer information. The increasing use of large data sets will also allow insurers to provide a more targeted approach, pricing individuals rather than groups of customers. Tye says: “We think over the next decade we will move away from the traditional model and transition to more personal pricing.” He points to a future model where insurers will provide a person with one package of life insurance that covers all needs. But he emphasises that this kind of model would be heavily reliant on technology and big data, as insurers would need access to vast quantities of information on individuals to be able to offer appropriate policies.

In the last 12 months there has been substantial investments from re/insurers in technology, according to Clyde & Co’s insurance growth report. It found that major global reinsurer Munich Re put $250 million into Californian start-up Next Insurance and $90 million into insurtech Singapore Life from Japan’s Sumitomo Life.

Another sector giant, Aon, recently announced the purchase of CoverWallet, a digital insurance platform, as part of plans to expand its data and analytics reach.

Private equity interest

The increasing interest of private equity investors in insurance is another key development that will steer M&A.

Low capital requirements and scalability of insurance brokers have been attracting private equity investors to the sector for a while, but Tye tells Intelligent Insurer that this has begun to accelerate.

“Around 75 percent of the insurance deals that come across my desk have private equity involvement compared to a couple years ago when this was around 25 percent,” he says.

Insurance as a whole is underrepresented on private equity dashboards, Tye adds, and therefore offers firms uncorrelated risk, allowing them to put to work large amounts of capital.

Private equity firms will increasingly use their investment expertise to mitigate the effect of low interest rates and improve the spreads of fixed and indexed annuity portfolios. One example of such a deal is Guggenheim Partner’s acquisition of Sun Life’s US annuity business in 2012.

More recently, Tye highlights private equity firm Apollo, which injected $1.6 billion into its affiliated life insurance company Athene in October 2019, doubling its economic stake in the company. “When you compare Athene’s interest rates to other insurers like AXA, they are earning four to five as much investment income because of their more aggressive approach,” he says.

The acquisition of an insurance firm also allows private equity businesses to diversify their portfolio. Tye explains: “For insurers, the quantity of their assets will be much larger than their equity, therefore a private equity firm can buy an insurance company and report these assets as their own.”

Reciprocally, private equity firms can bring value to insurance brokers. With fewer stakeholders to satisfy and fewer internal hurdles, private equity firms are usually able to make quicker decisions based on financial criteria.

Legacy Liabilities

John Marra, partner at PWC, tells Intelligent Insurer that companies divesting from legacy insurance liabilities will be another guiding force for M&A. “Insurers are looking to exit their legacy liabilities and if they can then they have a path to grow again,” he says.

Similarly, Vikram Sidhu, partner at Clyde & Co, says: “Activity in the run-off market is expected to pick up further in markets across the world. In the US, insurers will likely take further steps to explore divesting legacy books of insurance business through two recently enacted restructuring mechanisms known as insurance business transfers and corporate divisions, which several states have enacted into their laws in recent years.  We expect these new tools for legacy business to lead to a burst of new deal activity later this year and beyond.”

Political risk

“There is no question that the world's political risk is increasing. We’ve moved from a unified world to a world with Brexit, the Arab world splitting up and Trump splitting up the US,” says Tye. With increased uncertainty around global affairs in the form of trade tensions, sanctions and Brexit, insurers may be reluctant to enter new markets.

Ivor Edwards, European head of Clyde & Co's corporate insurance group, says: “The US presidential election may push some deal-makers to complete transactions ahead of a possible change in administration, while others will put plans on hold until uncertainty over the result is resolved.  Europe should see a return to business as usual now Brexit preparations are mainly completed but as the details of the future trading relationship between the UK and the EU remain unclear, this may spur transactions during the transition period.

M&A in Latin America

Latin America has real untapped M&A growth potential for insurance, says Ricardo Gonzalez Garcia, director of Sectoral and Regulation Research at Mapfre, emphasising that the region has just three percent of world insurance premiums.

Mapfre predicts growth in the overall market to be 10.5 percent on average. With large populations, low insurance penetration and attractive interest levels, the Latin American region is seeing a lot of interest from investors and insurers from outside the region looking to acquire new business.

Argentina, a market with higher penetration rates than its Latin American counterparts, is seeing 17.2 percent growth. Chile is also an attractive market with a well-established life insurance sector. Peru and Uruguay are both expected to see growth of 10.4 percent, according to figures from Mapfre.

The attractiveness of Latin American premium growth is especially prominent when compared to the slow growth that many insurance players in North America and Europe are currently witnessing in their home markets.

Global reinsurer SCOR recently acquired control of AgroBrasil, a family-owned managing general agent offering fruit and grain loss of crop quality and yield insurance protection to Brazilian farmers.

Regulation is one area of contention that arises in relation to the Latin American insurance sector. “In general, there are some regulatory barriers related to interactions with supervising authorities. In Latin America you have to interact with supervisors and analyse the technical information and this delays innovation in the insurance sector,” says Gonzalez Garcia.

While Brazil and Mexico are the region’s largest and most attractive markets, ratings agency AM Best has recently given Brazil’s reinsurance market a negative outlook, explaining that the country's volatile currency environment is a significant deterrent to investors. Despite nominal interest rates on Brazilian sovereign bonds being as high as 14 percent a few years ago, interest rates are now in the five percent range, with inflation around two to three percent.

Shifting demographics

Demographic changes are critical to the insurance market, says Tye. Such shifts are already affecting insurance industries on a global level as ageing societies will put an increasing strain on social security programmes, potentially accelerating demand for life insurance, health insurance and long-term savings from current levels.

These types of change are most prevalent in developed countries such as Japan, the UK and the US says Tye. “With the current low interest rate environment, the older population is putting a substantial strain on capital and cash flow in the insurance market, especially in Southern Europe.”

He explains that many baby boomers were given a guaranteed savings policy of around three percent on their pensions and with the current zero interest rate environment insurers are struggling.

China is facing its own ongoing demographic shift with a declining fertility rate and growth in numbers of older people putting pressure on the nation's social healthcare system. The country has clear potential to influence strategic decision-making by insurers in both mature and developing markets with new opportunities for insurers to develop new products within the Chinese healthcare system.

In light of the huge swathe of opportunities, and challenges, M&A activity continued to grow in 2019. And, with technology now baked-into M&A, according to analysts, and the growth of private equity investment taking centre stage, this positive growth looks set to continue into 2020.