4 minute read 24 Feb 2021
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Insurance M&A: a review of 2020 and expectations for 2021

By Martin Spit

Principal, EY-Parthenon, Ernst & Young LLP US and EY Americas Insurance Strategy and Transactions Leader

Help clients think through complex issues of strategic change, bridging organic growth strategies and inorganic transaction advice.

4 minute read 24 Feb 2021

After an initial slowdown due to the COVID-19 pandemic, insurance M&A activity in the Americas rebounded strongly at the end of 2020.

In brief

  • Insurance M&A activity in the Americas accelerated during the fourth quarter of 2020, when more than half of the year’s total deal value was announced.
  • We expect to see continued activity in 2021, driven by the need to power digital transformation, enhance customer experiences and achieve other strategic goals.
  • Block deals with private equity firms and reinsurers to free up capital for strategic uses will continue to play a prominent role.

We expect that momentum to continue into 2021, with transactions centered on key themes of bolstering digital capabilities, accelerating growth through new products and distribution, and making better use of capital through block transactions and partnerships with asset managers. In this article, we share our perspectives on the market.

2020 Insurance M&A in review

The market closed 2020 on an up note, with $15.8 billion in deals announced during the fourth quarter, compared with $14.6 billion during the first nine months. Transaction volumes for the year were on par with five-year trends, but the raw numbers gloss over some significant qualitative differences from years past as the industry continues to react to the effects of the pandemic and new technologies.

The life insurance and annuities space saw the greatest activity, as insurers looked to maximize capital and focus on core strengths through portfolio sales and reinsurance deals. Deals involving P&C insurers were often about scale, distribution or diversifying revenue streams. The need to keep pace with the accelerating digital transformation sparked an increase in InsurTech deals, as well.

Notable deals included:

  • Zurich Insurance and Farmers Exchanges announced a $3.94 billion acquisition of MetLife’s P&C business. The deal expands Farmers Exchanges’ US distribution network and adds more stable fee income to parent Zurich’s revenue stream.
  • Brown & Brown, a broker, announced the acquisition of CoverHound, a digital insurance marketplace for individuals and small businesses. The deal gives Brown & Brown access to a growing online origination niche, boosting fee income.
  • Equitable Holdings announced it would reinsure a $12 billion block of variable annuities through Venerable Holdings. The transaction strengthens Equitable’s balance sheet and allows it to redeploy capital to less capital-intensive businesses. It is one of several recent high-profile reinsurance and reinsurance-plus-equity transactions intended to de-risk portfolios and position life and annuity firms for growth.

Key drivers in Insurance M&A

Deal activity is being driven by several macro factors, including low interest rates and a nascent trend toward greater specialization. Equity and reinsurance deals in the life and annuity space show little sign of slowing, with price competition among reinsurers creating a seller’s market.

Perhaps the most important aspect is the need to quickly add digital capabilities in response to customers’ rapidly changing needs and expectations. According to the EY Digital Investment Index, global financial institutions used M&A as an investment strategy for 25% of their digital initiatives during the last two years. Those deals exceeded ROI expectations 52% of the time — more often than other transformation strategies, including partnerships, corporate venture capital investments and building in-house.

We expect to see continued deal activity driven by changes in four areas:

1. Critical actions

  • Strategic deals to power digital transformation, enhance customer experiences and achieve other strategic goals
  • Ecosystem partnerships to add those capabilities in a capital-efficient way
  • Transactions to improve operational resilience and efficiency

2. Bolstering the bottom line

  • Sales of blocks to private equity firms or other consolidators capable of squeezing greater returns from blocks in a low-rate environment
  • Continued reinsurance deals on closed blocks and annuities to free up capital
  • Divestitures of noncore business lines to focus on core operations and drive efficiency

3. Accelerating growth

  • Acquisitions of competitors in core or adjacent markets, aligned with individual company’s competitive advantage
  • Combinations of complementary strengths to expand product and distribution capabilities — 2+2=5 deals
  • Opportunistic acquisitions that capitalize on the sector’s relative financial strength to build market share

4. External influences

  • Anticipating how the Biden administration’s policies and regulatory stances will affect insurers
  • Responding to rapidly changing social-justice and climate-related issues
  • Preparing for an uncertain pandemic road ahead, which could lead to further consolidation

The beginning of 2021 brought hope in the form of vaccines for COVID-19, but no one knows exactly how things will evolve. Much the same can be said of the insurance M&A market. The surge of transactions in the fourth quarter suggests an active year ahead as insurers position themselves for a transforming competitive landscape.

 

Summary

How the market ultimately plays out will be shaped by the pandemic’s evolution and other external influences, but mostly by insurers’ willingness and ability to use M&A as a tool for achieving strategic growth objectives. It appears that good opportunities await sellers and buyers alike.

About this article

By Martin Spit

Principal, EY-Parthenon, Ernst & Young LLP US and EY Americas Insurance Strategy and Transactions Leader

Help clients think through complex issues of strategic change, bridging organic growth strategies and inorganic transaction advice.