Growth Strategy

A Consolidating Landscape

Five trends in 2018 for insurance mergers & acquisitions

by Mary Anne Durall

Ms. Durall is a key architech of SE2, a leading technology and third party administration company focused on the North American life and annuity insurance industry.
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Mergers and acquisitions (M&A) in the insurance space are not simply buy-and-sell arrangements. They are often very complex deals that present a long list of challenges. Despite the complexities involved, the insurance industry experienced a record-setting number of M&As in 2017, driven by buyers and sellers looking for growth opportunities to boost revenue growth, enter new markets, and improve their operating efficiencies.

This year, the appetite for M&As in the life and annuity industry remains strong, with no indications of a slowdown. In fact, research by Willis Towers Watson shows that, among firms that have made between one and two acquisitions in the past three years, 81 percent expect to make the same number of purchases in the next three years.

What we’ve learned from this influx of M&As is that insurers, by understanding marketplace trends, can be better equipped in anticipating, planning for and addressing M&A challenges. The following are five trends that can help organizations better anticipate and overcome M&A speedbumps:

1. An increase of private equity firm buyers of small carriers
Private equity firms typically buy insurance blocks from small carriers for their investment value alone. Today, the increase of small insurance carrier purchases can be attributed to the fact that the transaction permits the purchasing company to go through the regulatory process as a carrier, allowing them to create and sell new products.

2. More foreign entity purchasers
The increase of foreign entities purchasing insurance companies is growing. Not only can they find the markets and willing sellers in the U.S., but they can also enjoy the benefit of generally lower interest rates and the ability to spread their risk geographically. Moving into 2018, foreign insurers remain hyper focused on transforming their businesses and operating models, determined to strike deals that can help meet their objectives.

3. The growth of megadeals
Megadeals are defined as acquisitions of blocks with more than a million in-force policies, with sellers that tend to be very large insurance enterprises looking to outsource or sell large portions of their business. Recently, megadeals have been impacted by the uncertainty of the direction of tax and regulatory reform, such as the failed merger between HDFC Standard Life and Max Life — a deal that would have created one of the largest private-sector life insurers in the country.

tax-reform changes could result in additional compliance requirements, which could lead buyers to reconsider the appeal of certain markets

4. Changes in tax and regulatory policy
The latest tax reform has created a number of changes impacting insurers in the M&A process. According to Deloitte’s 2018 Insurance Industry Outlook, these changes could result in additional compliance requirements, which could lead buyers to reconsider the appeal of certain markets.

5. The modernization of the insurance value chain
The adoption of technology is significantly enhancing an organization’s ability to focus on specific components of the value chain where they can be the most competitive in the market. A recent report shows that this trend will continue, with more instances of M&A deals being completed specifically for the purpose of implementing strategic decisions around value chain participation.

As M&As continue to increase, insurers who have the right approach to technology and the ability to determine and follow the right operation model can experience greater success in any deal – large or small. When entering into a merger or acquisition, life insurers will be well-served by:

  • Adopting a more efficient operating model. Know ahead of time what your goals and objectives are and how you are going to manage the integration of major processes and IT platforms
  • Coordinating closely with the seller. Integrating buyer-seller teams is essential to determine seller constraints, along with the resources available to help ease the transition
  • Considering a TPA. A carrier that buys a block of business can benefit greatly from a TPA by operating at a lower cost and gaining critical digital technologies

M&As will not only continue, but accelerate in the coming years. Today, carriers have the potential to realize far-reaching value from an acquisition that goes beyond the financial return. Life and annuity companies with digital capabilities will see big opportunities in the coming year – but only with a commitment to integrating transformative technologies into operations. ◊

 

 

 

Endnotes
1. “New Horizons: How Diverse Growth Strategies Can Advance Digitalization in the Insurance Industry,” Willis Towers Watson and Merger Market Report; Jan. 13, 2017; https://www.willistowerswatson.com/en/insights/2017/01/How-diverse-growth-strategies-can-advance-digitalisation-in-the-insurance-industry
2. Deloitte 2018 Insurance M&A Outlook; https://www2.deloitte.com/us/en/pages/financial-services/articles/insurance-m-and-a-outlook.html.