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A demanding future The four trends that define insurance in 2020Chapter Three: The negotiating table beckons

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A demanding future | The four trends that define insurance in 2020 | Chapter Three

In a highly competitive environment, incumbent firms can no longer rely on organic growth or internal innovation. The winners will be those that can forge alliances with innovative start-ups; ally with InsurTech; and consolidate with their peers. A rapidly changing industry will require unprecedented dealmaking skills. In the third part of our new campaign A demanding future: The four trends that define insurance in 2020, based on an exclusive survey of 200 EMEA insurance executives, we reveal how the industry will use M&A, partnerships and alliances to advance growth.

The negotiating table beckons


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Key findings

Where growth will come from

72%agree that 50% or more growth in the insurance industry over the next five years will be the result of M&A.

Growth strategy

93% agree that M&A will be part of their organisation’s growth strategy in both the next year and long term.

New deals for new solutions

81%of firms have plans for a partnership or alliance.

Integration effectiveness

26%Only a quarter of respondents felt that their organisation was very effective at integrating the target in their last deal.

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Global M&A deal volumes hit unprecedented highs of nearly 21,000 deals in 2018. Values reached US$3.6 trillion, the third highest total on Mergermarket record, as companies have sought growth, access to new markets and products and – increasingly – technology.

Against this backdrop, deal activity has figured strongly in the insurance industry. 2018 saw 357 deals completed globally in the sector, up from 312 in 2017, and the third highest volume on Mergermarket record. Of these, 23 were valued at $1 billion or more, including AXA’s US$15.3 billion acquisition of property and casualty insurer XL Group and AIG’s US$5.6 billion acquisition of reinsurer Validus.

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M&A central to growth

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Figure 2. What percentage of growth in the insurance industry over the next five years do you believe will be the result of inorganic growth? (Percentage should total 100%)


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These deals were set against a backdrop of subdued GDP growth across Europe – with the exception of 2017, GDP growth in the EU has hovered around the 2% mark since the crisis, according to Statista1, with projections for slower growth over the coming years. Achieving strong organic growth, particularly in mature markets such as Europe, has therefore proved a challenge and there is little sign that this will change over the short term. This, combined with greater competition in the insurance market, a need to provide new services and products to customers in new, more efficient, ways and the need for insurers to scale up as a result of increased regulation, has led insurance companies to look beyond their business for growth opportunities.

Indeed, nearly half (49%) of all respondents said the need to expand product and service offerings was a major driver in the M&A deals they completed over the past three years – and this was the top response among all sub-sectors. The second biggest driver – again across life and annuity, property and casualty and reinsurance – was to increase their client base in existing markets. And, with rising pressure for insurers to improve their customer experience and increase the efficiency of their back office processes, it is unsurprising that acquisition of technology also appeared in the top three, with 31% overall saying this was a big driver for M&A over the past three years.

… nearly half (49%) of all respondents said the need to expand product and service offerings was a major driver of the M&A deals they completed over the past three years.


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Figure 4. What were the main drivers leading to your company completing this/these M&A deals? (select top two)


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More deals on the cards M&A activity looks set to continue, with all types of insurance companies setting their sights on dealmaking. The vast majority (94%) said that M&A is part of their organisation’s growth strategy over the coming year and for the foreseeable future. Evidence on the ground supports this. Italian insurance giant Generali, for example, has set aside €4 billion for growth over the next four years, with acquisitions, primarily of European insurance businesses and asset managers, an important part of its strategy2.

Over half of respondents (52%) expect to complete two or more deals over the next three years. Among the most active will be those in the reinsurance and global specialty sub-sector, with 28% expecting to complete at least three deals (compared with just 9% in property and casualty). Recent deals in this sub-sector worldwide have included Renaissance Re’s US$1.5 billion deal to acquire Tokio Millennium Re in 2018, Axis Capital’s acquisition of Lloyd’s insurer Novae for £468 million in 2017 and Enstar Group’s US$272.4 million purchase of Maiden Re.

Deals such as these reflect the need for scale and the resultant benefits of cost reductions when facing the broader consolidation of the insurance market, which has reduced reinsurance purchases, and the low investment return environment in the post-financial crisis market. Our survey results suggest that consolidation within the reinsurance and specialty market will continue for the foreseeable future.


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Figure 5. Please state whether you agree or disagree with the following statements: M&A is part of my organisation's growth strategy in the next year

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Figure 6. Please state whether you agree or disagree with the following statements: M&A is part of my organisation's long term growth strategy in the next 3 years

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Breaking new ground with M&A The main deal driver for next three years will be the need to expand product and service offerings, although the emphasis on this has fallen a little. This was cited by 42% of respondents for future deals (versus the 49% mentioned for recent past deals). Also important, but declining, will be M&A driven by a desire to increase client bases in existing markets, the rationale for 32% of respondents (versus 42% in the past three years). Meanwhile, acquisition of technology as a rationale will increase marginally, from 31% to 32% (although this is particularly significant for reinsurers, 40% of whom are searching for targets with technology in mind).

Transformation of the business and operating models will also increase in importance as motivations for M&A over the next three years. These were mentioned by 22% and 17% of respondents, respectively. Reinsurers in particular are looking to transform their business models as they shift away from being mono-line businesses towards offering a more diversified set of products, including operating in the primary insurance market – a trend that has been in evidence for several years now.

These last two drivers mainly reflect the rapid pace of change in the market and are almost certainly an alternative expression of access to technology as a deal driver. Faced with rising competition from new, digitally-driven competitors, companies are having to find ways of shifting their business models by harnessing big data and advanced analytics technologies. They also need to modernise their operating models to align these with digital business strategies, create more streamlined organisations and automate manual tasks. Targeted M&A may be one way of insurance companies achieving these aims.

InsurTech M&A is ready for take-offAn obvious route for digital transformation across the entire insurance market value chain is by acquiring or investing in the burgeoning InsurTech market. And, while there has certainly been investment by insurance companies in this space, M&A has been slower to emerge.

Our data suggests that only one in ten InsurTechs established in the past decade have ended up being acquired3. However, we expect this to change over the near to medium term as these businesses offer vital solutions across the front, middle and back offices. One of the reasons for low activity to date has been the small size of many of these businesses – in 2016, for example, 151 InsurTech businesses raised US$1.4 billion; by 2018, the investment value had more than doubled to US$3.2 billion for the year, going into fewer companies – 138 in total4.

As InsurTechs increasingly scale up, it is likely that they will become more attractive as targets for insurers looking for faster ways of achieving business model and operational transformation than building capability in-house.

We have seen this in the wider FinTech space, with banking groups increasingly acquiring more mature financial technology businesses. In 2018, Goldman Sachs, for example, acquired personal finance app Clarity Money to boosts its Marcus retail banking business5. In the same year, RBS acquired cloud accounting software business FreeAgent after working together since 2016, in a move that RBS chief executive Ross McEwan said would enhance “technology-enabled solutions” for customers6. This is a pattern we expect to be repeated in InsurTech.


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Figure 7. How many M&A deals do you expect to complete over the next three years?

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Figure 8. What are the main drivers for your company in potentially completing these M&A deals? (select top two)


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Focusing on the core As part of their M&A strategy, some insurance companies will seek to simplify their organisations and focus on core activities. Aviva, for example, has announced its life and general insurance businesses will now be managed separately, after new chief executive Maurice Tulloch described the group as “still too complex”7,8.

Over half (59%) of respondents are planning to make at least one divestment. Motivations for disposals varied, although the top answer was removal of underperforming units, mentioned by 32% of all respondents and led by reinsurance, where 47% said this.

The challenges faced by insurance companies in transforming their businesses in today’s technology-enabled world are reflected in the second biggest motivator for disposals. Over a quarter (27%) said that they were seeking to remove units that are too difficult or too resource-intensive to digitally disrupt – this was a big challenge for reinsurers (33% said this) and property and casualty insurers (31%). Non-core disposals will also account for a decent share of divestment activity, cited by 23% of respondents overall.

Private equity eyes the marketWhile some of these businesses may be snapped up by other insurers looking to diversify their offerings, others, which may have suffered from under-investment or a lack of attention, make them ripe opportunities for private equity buyers. The past decade has seen many private equity firms increase their participation in the insurance market as they have built in-house expert teams and, in some cases, raised financial services-specific funds.

One area in particular that has caught private equity’s attention has been back book life insurance deals in Europe. These are non-core life insurance and pensions’ books in run-off being divested as life insurers seek to release capital and focus on core activities. The value of such deals increased from €60 billion in 2017 to €263 billion in 2018, according to Fitch9.

Examples include Cinven portfolio company Viridium which is consolidating such businesses to generate economies of scale and to improve investment performance; last year, Viridium acquired Generali Lebensversicherung in a deal that added 4m policies and €40 billion of assets under management to Viridium’s business10. Another example is Oaktree-backed Life Consolidation Group, which acquired Equitable Life in 2018.

Private equity also has its sights set on general insurers. Last summer, Bain capital took UK insurer esure private in a £1.21 billion deal, for example.


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Figure 9. If your company is planning any divestments, what are the main drivers for this? (select top two OR 'Not planning any divestments')

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Dealmaking dilemmas Appetite for M&A may be high, but still challenges remain. The biggest obstacle cited by our respondents was regional or global instability, volatility and uncertainty, mentioned by nearly half (49%), with property and casualty insurers seeing this as a particular challenge (57%). The second biggest challenge was regulatory and legal obstacles, mentioned by 41% of respondents.

Encouragingly, internal blocks to M&A activity were seen as far less of a challenge – lack of internal capability and gaining board approval were far lower down the list, suggesting that insurers have the right teams in place to get deals done and that they have board support.

When asked about their geopolitical concerns around M&A more specifically, Brexit emerged as a significant factor in reducing M&A appetite – more than three quarters (78%) said this was having a negative effect on dealmaking. US protectionism is far less of a factor – over half (51%) said this was not affecting their M&A plans, with property and casualty the least affected (59%).

Economic concerns are also high up the list of factors affecting M&A activity. Insurers are split when it comes to slow economic growth: 58% said this was putting them off M&A, while 42% said it was increasing their appetite as companies look to boost expansion in new products or geographic markets to offset sluggish economic growth.

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Figure 11. How are the following macro-economic and geopolitical trends affecting your M&A appetite? Brexit


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Figure 13. How are you following macro-economic and geopolitical trends affecting your M&A appetite? Currency volatility


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Figure 14. How are you following macro-economic and geopolitical trends affecting your M&A appetite? Slow economic growth


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A brave new world of alliances and partnerships

Of course, M&A is not the only route to finding new customers and accessing new markets. The bancassurance model of offering insurance products using banks as distribution channels has also been around for decades. It is often a means of accessing emerging markets – as the 2017 tie-up between Allianz and Standard Chartered to offer general insurance bancassurance across Asian markets attests.

Yet it is a model that also continues to work well in more mature markets: the roll-out of open banking in the UK, for example, could help insurance companies streamline application processes for new customers as well as offer insurers ways of owning the customer. Partnerships with FinTechs can offer new distribution channels using digital platforms. FinTech Revolut, for example, offers mobile phone insurance and pay-per-day travel insurance using geolocation technology11.

New deals for new solutionsIn today’s digital landscape, different partners are emerging. Tech firms, with their distribution capability and data analysis capability, are already partnering with banks – Apple and Goldman Sachs have announced a partnership to launch a new consumer credit card, for example12. It won’t be long before these types of alliances appear in the insurance industry.

This trend is reflected in our survey results. Over four-fifths (81%) of respondents said they had firm plans for a partnership or alliance within an existing market, with a further 11% considering this. Nearly half (44%) also had firm plans to partner in a new market and a further 8% are looking at such a move.

One of the biggest advantages of these partnership models is that they can provide new distribution channels that access attractive customer bases. The model often enables insurers to gain a better understanding of the target customer base and access to data, enabling them to improve or refine pricing. Nevertheless, insurers often pay high upfront costs to partners for this access and, ultimately, the balance of power usually sits with the customer owner.

Key finding

81%have firm plans for a partnership or alliance in an existing market, and 44% for expansion in a new market.


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Figure 15. For the purposes of business growth, does your company have firm plans for or are considering Partnership/alliance within an existing market (select one for each strategy)

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Figure 16. For the purposes of business growth, does your company have firm plans for or are considering Partnership/alliance within an existing market (select one for each strategy)

Look beyond the dealcompletion

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Integration equals success

While most insurers remain committed to pursuing M&A as a path to growth, the industry seems less convinced by the benefits it has achieved from such activity in the past.

Just 26% felt their organisation was very effective at integrating the target in their last deal (falling to 20% of reinsurers) and only around a third (33%) said it had been very effective at generating profitable business growth. Indeed, the biggest responses for both were “slightly effective” (59% and 44%, respectively).

This suggests that the industry is some way from generating maximum value from its M&A deals. Poorly integrated businesses fail to achieve expected synergies and are at least in part responsible for the complex organisational and technology structures in place that are currently holding back many insurers’ attempts to keep up with more nimble competitors. The narrow focus on integrating already-outdated business models without taking the opportunity to create a futureproofed combined organisation is also likely to be hampering efforts to generate sustainable profitable growth from their acquisitions, a trend that will continue as the industry continues to face disruption.


Look beyond the dealcompletion




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4Look beyond the dealcompletion




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Integration success requires detailed planning ahead of the deal closing and swift action thereafter. The following four steps should be the foundation of any successful integration:

Look well beyond the deal completion phase by focusing on the post-deal value creating outcomes. Much of the hard work in M&A comes after – not before – the deal is signed. Choosing and negotiating with the right target, which is where many companies place their efforts, is only the start of what needs to be an end-to-end M&A process.

Define the integration strategy, synergy case, high-level integrated blueprint and outline integration plan before the deal is signed. This enables detailed planning to start immediately thereafter and often with involvement from the counterparty. The goal is to be delivering the integration and associated benefits from day one.


4Look beyond the dealcompletion




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Dedicating your best resources to post-deal implementation and empowering your leaders to deliver the integration is critical so that the desired outcomes are achieved quickly and effectively.

Leverage the integration opportunity as a platform for wider transformation and evolution of your operating model. With significant advances in technology, changes in workforce needs, and disruptive market forces, executing M&A can be the perfect catalyst for the organisational advancement necessary to win in this fast-changing market.



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Figure 17. In reference to your last M&A deal, how effective was your organisation at integrating the target into the business

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Figure 18. In reference to your last M&A deal, how effective was your organisation at generating business growth as result of the deal


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David RushEMEA Insurance Sector [email protected]

Vincent RapiauPartner - [email protected]

Jonathan GoldPartner – [email protected]

Tom JohannessenPartner – Nordics [email protected]

Elisa FabrisPartner – Italy [email protected]

Martin ReillyPartner – [email protected]

Ian SparshottGlobal Insurance Financial Advisory [email protected]

Contacts

Jordi MontalboEMEA Insurance Sector [email protected]

Frank NagelPartner – [email protected]

Neal BaumannGlobal Insurance Sector [email protected]

Siebe GroenveldPartner – [email protected]

Enrique Gutiérrez de la RochaPartner – [email protected]


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1. https://www.statista.com/statistics/267898/gross-domestic-product-gdp-growth-in-eu-and-euro-area/

2. https://www.insurancejournal.com/news/international/2018/11/21/509926.htm

3. https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-dcfs-insurtech-entering-second- -wave.pdf

4. https://fintech.global/global-insurtech-funding-tops-3bn-in-2018/

5. https://www.reuters.com/article/us-clarity-m-a-goldman-sachs/goldman-sachs-buys-personal-finance-start-up-clarity-money-idUSKBN1HM0Z7

6. https://www.ft.com/content/96c5bd4a-31b7-11e8-ac48-10c6fdc22f03

7. https://www.ft.com/content/986f1a4e-7e3a-11e9-81d2-f785092ab560

8. https://www.ft.com/content/08fc7f2e-8807-11e9-97ea-05ac2431f453

9. https://www.ft.com/content/4e89ff8e-c8af-11e8-ba8f-ee390057b8c9

10. https://www.cinven.com/media/news/cinven-to-acquire-and-combine-viridium-group-and-generali-lebensversicherung-ag/

11. https://www.insurancebusinessmag.com/uk/news/technology/revolut-introduces-another-insurance-product-89584.aspx

12. https://www.forbes.com/sites/camilomaldonado/2019/03/21/apple-goldman-new-credit-card/#51da49a05676

Endnotes

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