Now that the dust is settling after an unpredictable and historically challenging period, insurers are going on the offensive by pursuing innovation, building out core capabilities and aggressively taking market share.
This is driving a frenzy of M&A in the property/casualty insurance space. Through the first half of 2021, we saw a record number of deals occur with acquisition targets in the sector: 453 deals, up 13.3 percent over the same period in 2020, according to S&P Global Market Intelligence. (Editor’s Note: There were 375 deals in the insurance brokerage space during the first half of the year, up from 331 transactions in the first six months of 2020. Insurance underwriter deals rose to 78 in first-half 2021 vs. 69 in the same period last year. Both increases were just over 13 percent.)
Looking ahead, we expect to see continued growth in deal activity in the insurance industry due to several key drivers:
Favorable economic environment. The current economic conditions are favorable to support inorganic growth. The hyper-conservative approach taken by buyers in 2020 has led to record levels of deployable capital within insurance and private equity. Interest rates remain near record lows, with the 10-year treasury yield hovering around 1.3 percent, making debt affordable to hold.
For sellers, record-high valuations (upward of 10x over the last three years’ valuations, per Pitchbook) and the impending threat of a sizable increase to the capital gains tax (proposed increase from 20 percent to 39.9 percent) are accelerating exit plans.
Downward pressure on premiums is having a negative impact on profitability, forcing carriers to divest non-core products. According to EY, 58 percent of insurance companies plan to divest within the next two years due to changing technology and an evolving competitive landscape.
Past examples of deals in this category include the $4 billion acquisition of MetLife’s P/C by Farmers Insurance announced late last year (and completed in April this year) and Allstate’s $2.8 billion sale of Allstate Life Insurance Company to entities managed by investment firm Blackstone, announced in January.
For buyers, this presents a significant opportunity to strengthen core products, service new customer types and expand geographic reach. We expect this trend to continue as carriers place more investments to take share within core product lines.
Carriers are playing catch-up to meet shifting consumer behavior trends. Consumer preferences for how they purchase and engage with financial service and insurance products is shifting with the emergence of millennial and Gen-Z populations. The growing reliance on digital technologies is reshaping customer expectations, and few carriers are adequately equipped to support end-to-end digital experiences. As a result, InsurTechs have managed to carve out a foothold in the market by attracting younger, technology-fluent consumers. Incumbents are seeking to rapidly obtain these capabilities via acquisitions.
Two recent examples of incumbents buying InsurTechs involved USAA and American Family. In June, USAA announced plans to acquire Noblr, an InsurTech digital insurer offering usage-based auto insurance. In January, American Family announced it would acquire Bold Penguin, a digital exchange used by insurance agents, brokers and other distributors to match, quote and bind policies from a range of insurers.
Increasing competition is driving up customer-acquisition costs, forcing carriers to employ alternative growth strategies. If you watch television, listen to radio or browse the Internet, you know how widespread and aggressive insurance advertising has become. In 2020, Progressive and GEICO spent $1.95 billion and $2.26 billion, respectively, on advertising (S&P Market Intelligence), and those expenditures are growing in 2021. While both companies have experienced double-digit year-over-year premium growth, efficiencies are decreasing as a result of increased advertising spend and downward pressure on premiums.
With growing customer acquisition costs, carriers are actively looking to supplement organic growth via acquisition. This trend is likely to continue throughout 2021 and well into 2022 as competition increases and market consolidation continues.
Deals targeting growth already announced in 2020 and 2021 include Liberty Mutual’s deal for State Auto, Allstate’s deals for SafeAuto and National General, and State Farm acquiring GAINSCO.
Increased regulatory scrutiny and the examination of traditional insurance rating factors for discriminatory biases are forcing insurance companies to adopt new practices to underwriting risk. Washington is the latest in a string of states to announce bans on the use of credit scores for pricing insurance. This trend is expected to continue and have a major impact on insurance operations. As a result, insurers are being forced to rethink their approach and are increasingly turning to new rate variables such as telematics.
Besides USAA’s planned acquisition of Noblr, deals involving telematics providers have included one in which Cambridge Mobile Telematics acquired competitor TrueMotion and a deal that saw insurance software company Earnix buy the assets of Driveway Software Corp.
While it is difficult to decipher exactly how the market will play out, elevated M&A activity is likely to continue through the remainder of 2021 and well into 2022 as conditions remain favorable for buyers and sellers alike.