By Yizhu Wang, with analytics by Elizabeth Lim
Mid-cap domestic insurance firms are looking to join forces in response to a saturated and competitive US insurance market.
So far this year six of seven announced transactions above $1 billion in value among US financial services firms involved insurers, according to Mergermarket data. The deals range from property & casualty, life and title insurance, with a total valuation of $27.4 billion. The 1Q18 figure has already surpassed values for all of 2016 and 2017. (This data excludes health insurance deals.)
Sector advisors said there have been more M&A conversations recently in the insurance sector, especially among providers of specialty insurance and reinsurance, Mergermarket reported last month.
Among notable deals this year, AXA announced to acquire XL Group for around $15 billion this month and American International Group announced its $5.56 billion acquisition of Bermuda-based reinsurer Validus in January. Aspen Insurance Holdings, a $2.68 billion market cap insurer based in Bermuda, is reportedly exploring a sale.
Mid-cap US insurers are also riding the trend of M&A, because they have come to a point where it is difficult to grow organically. The deployment of technology has helped the industry cut expenses. The fierce competition in niche regions, such as the P&C sector in Florida, has made the business less profitable.
Chicago, Illinois-based Kemper, for example, announced the acquisition of Infinity Property and Casualty Insurance in February for around $1.3 billion. Kemper and Infinity both had approximately $1.3 billion in net premiums written (NPW) in 2016.
The deal makes Kemper the 14th largest personal auto insurer in terms of the NPW volume, a leapfrog past seven other competitors, according to an investor presentation by CEO Joseph Lacher Jr. and CFO James McKinney at the Raymond James and CFA Society New York's insurance conference last month. Kemper now has $2.9 billion in market capitalization. Kemper shares initially declined after the deal was announced but have since recovered.
The auto insurance market is still fragmented, and each of the companies have different strengths and weaknesses in operations such as underwriting or claim management, which will continue to drive the consolidation going forward, McKinney said on the sidelines of the conference.
In another example, Lincoln Financial announced its acquisition of Liberty Life Assurance Company of Boston for $3.3 billion in January. The deal enabled Lincoln Financial to become the largest player in the fully insured disability market with a 14% market share, according to a press release. Lincoln Financial has a market cap of $16 billion.
Unlike the larger insurers being proactive in M&A, the "fintech play" provides small-cap insurers with sufficient space for organic growth. It is easier for a smaller insurer to stand out in the competition by applying technology, as their competitors in the regional and private insurance market are still lagging behind in insurance technology. Those institutions have been benefiting from using predictive data analytics and machine learning for underwriting, claim management, distribution and regulatory compliance, primarily by in-house R&D and partnerships with insuretech firms, according to the executives.
Atlas Financial Holdings, a P&C insurer having $125 million in market cap, has been intentionally investing heavily in technology for about three years, CEO Scott Wollney said in a presentation at last month’s insurance conference.
Atlas specializes in insurance products for light commercial automobiles such as taxi, limousine and non-emergency para-transit, and it primarily competes with private regional insurers. It is not aiming to challenge the giant insurers in technology innovation, but is instead evaluating what has worked well among early adopters. It picks the well-established concepts and applies them in its niche market where no one else is using them, Wollney said.
Venture capital-backed insuretech disruptors have not been playing a major role in M&A. As the insuretech landscape is evolving rapidly, insurers prefer to build nimble and manageable partnerships and monitor what will happen next, as opposed to being committed to certain technologies by M&A, Wollney said on the sidelines.
Also, the investor base of a traditional insurer tends to be risk averse regarding testing water of new technologies, so traditional insurers tend to be conservative about an acquisition of a bold insuretech firm, according to the executives.
Going forward, consolidation among the US mid-cap insurers is expected to continue as they look to expand market share, deploy capital more efficiently, and seek complements in product lines or geographical coverage. In comparison, relatively smaller insurers may have more space driving organic growth by technology.
Yizhu Wang is a financial technology reporter for Mergermarket and Dealreporter based in New York.
Elizabeth Lim is a research editor and senior analyst for Mergermarket covering the Americas M&A market from New York City.
