Pandemic helped fuel insurance broker M&A in 2020. Will that M&A continue in 2021?
Updated: Feb 16
Insurance broker M&A volume experienced a modest increase in 2020 during the global COVID-19 pandemic and resulting economic fallout.
In total, 754 M&A deals were closed last year, up from 744 transactions in 2019, says a recent analysis from S&P Global Market Intelligence.
In contrast, insurance underwriters announced 151 M&A transactions in 2020, down from 165 in 2019, with a particularly slow fourth quarter when only 40 transactions were reported.
According to Alex Zuckerman, CMO & chief strategy officer of Sapiens International Corporation, the pandemic put incredible pressure on agencies and brokerages as they were forced to digitize operations amidst the ’new normal’ business environment. As a result, several turned to M&A opportunities to cut costs and focus on operational efficiency.
“Those who were able to adapt quickly and utilize digital solutions could win customers and compete; however, those who have been unable to, due to either a lack of resources or understanding, have faltered,” Zuckerman told PropertyCasualty360.com.
As the pandemic accelerated digital transformation in the broker channel, non-digital-savvy agencies were pitted against their own digital sales channels, Zukerman explained, which, when paired with growing competition from new players and a need to drive new revenue streams, created an ‘inevitable’ M&A trend.
“Eventually, companies found ways to operate in this ‘new normal’ situation and started again to look for growth and new market opportunities. Insurers, like their counterparts from other industries, are looking to M&A to fulfill the abovementioned goals. Whether they search for strategic acquisitions in an effort to optimize their portfolios, enhance their capabilities, or better serve their constituents — all these and more are driving the trend,” he added.
What to expect in 2021
All insurance sectors should see increased M&A activity this year, as insurers respond to the pandemic and strive for the economies of scale vital to their competitiveness, Zuckerman said.
On the insurance broker side, basic supply and demand will drive much of the action: With more than 30,000 insurance brokers in the U.S., there is plentiful inventory for acquisition opportunities while capital remains abundant, said an S&P Global Ratings report released in January. Additionally, interest from private-equity-backed buyers will likely fuel transactions this year as the industry’s resiliency is reaffirmed through the pandemic.
“Today, even though economic uncertainty remains, the recovery of the insurance sector may indicate a return to the M&A activity experienced in 2019,” Zuckerman noted. “This offers insurance companies and brokers a chance to expand through both inorganic and organic activities while maintaining portfolio optimization, improving customer experience and innovation.”
Recent mergers in the P&C space, including the Aon and Willis Towers Watson deal and Intact Financial Corp. and Tryg’s acquisition of RSA Insurance Group, indicate more robust activity is ahead for the sector, Zuckerman noted. While competition from InsurTech carriers, such as Lemonade and Hippo, as well as a rise in demand for usage-based coverage, will bolster M&A interest.
Citing Deloitte’s 2020 Insurance M&A Midyear Update, Zuckerman said increased disruption has historically created M&A opportunities, which is what is expected this year, as more than half of insurance executives said they expect to complete an M&A transaction in the next two years.
“Competition is always positive, not only for consumers and policyholders but for the industry as a whole,” Zuckerman said. “There is an argument that consolidation will lead to less competition, and therefore, have a detrimental long-term effect on the insurance industry. However, M&As will be good for the industry as they will force insurers to adapt and embrace the latest technologies and approaches to better serve their clients. We will see the rise of larger, more financially stable insurers that will be more streamlined and efficient in their operations, which will push the industry as a whole to take giant leaps forward.” Full Article
Heather A. Turner
Heather A. Turner is the managing editor of ALM's NU Property & Casualty Group. She can be reached at email@example.com.