M&A In The Global Health and Life Insurance Industry

Common drivers of mergers and acquisitions in the global health and life insurance industry include the entry into new markets, access to new technologies, valuation trends, and reaction to regulatory changes. With growth strategies leading the charge, market expansion is often made possible through the acquisition of target companies that optimize product portfolios and customer bases, especially those that provide relatively easy yet quite valuable add-on opportunities, as organic growth does not come easily in the insurance space.

InsurTech

Another major impetus behind M&A is investment in new technologies to boost sales, enhance customer service, and improve distribution efforts. Data analytics and predictive modeling help insurers address challenges such as fraud detection, as well as to upgrade underwriting and risk management tools. Technology is used to improve distribution through investment in more distribution outlets and digital platforms.

Insurers in the middle market are those between $500 million and $2 billion in size that typically serve community or niche markets. However, the emergence of technology companies in the insurance sector is reshaping the entire landscape by changing how things work. These companies, known as InsurTechs, focus on bringing new innovations in technology to customers in the insurance industry, altering the customer-insurer relationship.

As younger populations take the place of aging ones, digital technologies offer online and mobile options that appeal to these younger markets. These customers are tech savvy and not as company-loyal as their preceding generations. They have a tendency to view insurance products and services as being all the same, which is where enhanced conveniences and removal of personal interaction motivate their choices.

Because of this changing sector, middle-market insurance companies are being subjected to changes in scale and capabilities and are facing consolidation as the only viable option for them to remain competitive. 

Valuation Drivers

The value of health and life insurance companies is typically driven by growth, profitability and risk.

Growth

Demographics and interest rates are key factors in the sale of health and life insurance companies. Growth of certain age groups—or lack thereof—affects the demand for certain types of policies, such as death benefits. With regard to falling interest rates, net investment income growth slows as yields on insurers' bond portfolios slide. Yet, falling rates also raise the value of underlying assets that generate investment income.

Profitability

The income of insurers comes in two parts: underwriting income and investment income. Profitability for health and life insurance companies can be affected by:

• Base premium increases
• Growth in income from fee-based products
• The amount of reinsurance
• Cost of policyholder benefits, costs to acquire new business, including agent commissions and other related selling expenses
• Investment income
• Loss reserves

Risk

Because insurers must be able to pay policyholder claims promptly, liquidity and leverage are significant factors to consider.

• Liquidity sources include underwriting cash flow, investment cash flow, and asset liquidation cash flow.
• Leverage measures the length to which policyholder surplus or shareholder equity is used to create business. Greater leverage tends to come with higher the premiums relative to policyholder surplus.
• Insurance companies often keep much of their investment portfolios in corporate bonds, and bond default rates can decrease value.

Shrink and Grow Strategies

M&A in this sector can also be used to help companies to exit certain markets, clean up financials, and make moves that are more aligned with their long-term vision for the business. Acquisition of underperforming companies can serve as a strategy to downsize prior to creating growth. 

Regulatory Changes

Changing regulatory environments and political uncertainties are also significant drivers of M&A activity in the health and life insurance industry. Key regulatory issues include data privacy, cybersecurity, solvency, reduced capital, principal-based reserving, foreign investing, free trade zones, consumer protection, and governance and risk. Regulatory compliance may lead to M&A activity through the restructuring of multiple business divisions.

The Role of Reinsurers in M&A

In the health and life insurance sector, reinsurers are involved in M&A in several important ways.

• Financing by reinsuring the client’s existing business, giving it the resources needed to make acquisitions. Reinsurers may also support M&A by reinsuring a portion of the target business.
• Entity purchasing to deploy capital to support the in-force business.
• Equity co-investing by holding smaller shares in run-off opportunities.

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