In the immediate aftermath of the COVID-19 lockdowns in early 2020, M&A activity in the insurance industry dropped off as deals were put on "pause" while potential buyers waited to see how the pandemic would affect the availability of capital, target company values, and the ability of the parties and service providers to carry on with the acquisition process.
By the second half of 2020, it had become apparent that the factors previously driving insurance industry M&A were continuing unabated, and, in some cases, such as the digital transformation of insurance, were being accelerated by the pandemic. The last half of 2020 saw a rally resulting in the highest deal volume for comparable periods in the past several years.
In late 2020, many analysts predicted an acceleration of insurance industry M&A activity through 2021. With the first half of 2021 behind us, we have seen those predictions bear out with both a high number of transactions and high aggregate transaction values across the insurance industry.
The Reasons
Here are four of the key factors driving this high level of M&A activity.
1. Consolidation in the Brokerage Industry
A large percentage of the recent transaction volume is driven by ongoing consolidation in the brokerage industry, where private equity backed aggregators are rolling up independent brokers, thereby gaining economies of scale and greater leverage to negotiate commissions.
2. Persistent Low Interest Rates
In the life and annuities sector, where the persistent low interest rate environment is putting pressure on company profitability, many carriers are looking to divest unprofitable product lines. On the buy side, private equity firms and money managers are looking to add to their assets under management by acquiring closed books, often through offshore reinsurance transactions which take advantage of the greater regulatory flexibility found in non-U.S. jurisdictions.
3. Strategic Acquisitions and Carve Outs of Noncore Business
While traditional M&A drivers such as increasing geographic scope, accessing new distribution channels, diversifying product offerings, adding operational capabilities, and achieving economies of scale continue to drive M&A activity, many insurance companies have reevaluated their growth strategies. Many companies have elected to shift their strategic focus to narrower and deeper product offerings in their core business lines.
This strategic shift has been coupled with record high levels of capital and surplus across the industry and a low interest rate environment, resulting in many companies choosing to deploy some of that capital on acquisitions rather than traditional passive investments.
These drivers have led to an active market for strategic acquisitions and roll-ups as companies seek to grow more quickly and in a more directed manner than could be accomplished through organic growth.
