Business separations could be “top of mind” for global insurance brokerage executives looking to unlock value as major players ramp up internal transformation efforts, an insurance deals expert at PwC has said.
“A lot of the boards and management teams are looking internally and saying, ‘OK, we’ve got consulting, we’ve got brokerage’ – in the case of Marsh [McLennan], they’ve got several other businesses with distinct brands,” Mark Friedman, PwC US insurance deals leader, told Insurance Business. “Any good management team that owns any sort of conglomerate [or] various businesses with limited overlap, are going to look at it and say, ‘is there a way to unlock shareholder value by separating businesses?’
“I’m not sure what direction they’ll go in, but that analysis has got to be top of mind, given what we’ve seen from others in this space, and frankly, in other sectors… is the sum of the parts worth more than what the current valuation is and is there a way to unlock value?”
Insurance carriers have, over the past two decades, already shifted to simplification, looking to business sales and separation to drive profitability in core businesses rather than acting as broader one-stop shops.
“The market rewards simplification versus conglomerates or just broadly being a one stop shop, and, to be fair, no company has ever really done well cross selling products in the insurance space,” Friedman said.
Recent examples over in the US, might include Allstate’s bid to offload its health and benefits business and AIG’s plans to further decrease its stake in Corebridge Financial.
Historical transactions include The Hartford going P&C with its sale of run-off business Talcott Resolution, and MetLife and Prudential moving in the opposite direction with P&C sales to Zurich and Liberty Mutual respectively.
The underwriting side of the insurance industry is now undergoing what could be seen as the next wave of this, with companies lasering in on increasingly focused areas.
“Companies have seen and experienced that when you incentivise people with the right incentives, having a group focus just on inland marine, just on commercial auto, it allows them to immerse themselves and they do better at underwriting because they’re not broadly focused on various different risks – they know a small subset of the risks, but they know them very well,” Friedman said.
AIG’s high net worth (HNW) and ultra-high net worth (UHNW) spin out of MGA Private Client Select Insurance Services could be seen in this context, with the insurance giant betting on the right incentives, tighter focus, and private capital to boost performance.
Banks, too, have looked to simplification, in a trend that could be set to continue bolstering insurance brokerage deals.
In 2023, Truist sold a minority stake in Truist Insurance to Stone Point Capital, with talks reportedly moving on in October as the bank looked to sell the rest of the insurance arm, while Gallagher snapped up the insurance brokerage businesses of Eastern Bank and Cadence Bank.
“Is a bank with a US$50 billion to US$100 billion dollar balance sheet that has this side hustle business that’s 10% or 15% getting the real multiple of an insurance broker that a standalone company like Gallagher or Ryan Specialty Group is getting?” Friedman queried.
Mortgage exposure concerns and the risk of regulators taking a different approach to capital could drive banks to sell up their insurance assets as they too look to simplification.
“What we’ve seen is banks realising that while their industry is under some stress, they have these prized assets that they could really monetise at a relatively high valuation, shore up their balance sheets and be able to focus on what they’re good at and what’s core to their strategy, which is the core banking operations.”
Friedman spoke to Insurance Business as part of a January interview on M&A trends in the insurance sector.
For the six months beginning mid-May and ending mid-November 2023, the insurance space saw 318 announced transactions, valued at over US$11.2 billion total, according to PwC.
This was up from 298 deals announcements valued at US$7.7 billion seen in the same period the prior year.
Insurance carriers and brokers are set to continue being attractive targets in 2024 amid a managing general agent (MGA) deal boom and a shift in focus on to property and casualty (P&C) acquisitions, PwC predicted.
In PwC’s US Deals 2024 Outlook, the insurance and asset and wealth management sectors were ranked as most likely, compared to the overall market, to engage in M&A amid a broader tightening of purse strings.
“Nothing’s recession proof, we’ve previously seen people not do well in the insurance sector [during an economic squeeze], but it has proven to be very resilient through various different market cycles,” Friedman said. “We continue to see more and more entrants, or potential entrants, into the space.”
While underwriting valuations have broadly ticked up, brokers have experienced some downward pressure relating to financing costs, according to Friedman, who caveated that valuations have come down “a bit more” in other sectors.
M&A activity around P&C businesses is hotting up after a slew of major deals, including Brookfield Reinsurance’s US$4.3 billion America Equity Life deal and National Western Life Group’s merger agreement with S. USA Life Insurance Company, on the life insurance and annuities side.
“The market over the last couple years was dominated by life and annuity platforms and brokerage,” Friedman said. “We’re seeing a bit of a shift, so we’re seeing a lot more activity on the P&C side.”
Dwindling inventory has compounded with regulatory CP2 changes coming out of Bermuda, giving acquirers pause for thought. This life insurance hesitancy has created a “vacuum”, according to Friedman, with capital now pushing into P&C, with a focus on insurers, underwriting businesses and MGAs.
With P&C insurers increasingly looking to snap up distributors with profitable underwriting track records, the specialty MGA market is set to remain hot, PwC predicted.
“A lot of the brokers are realising that the future of underwriting and fee business and insurance is shifting more towards MGA and MGU type models, as opposed to the traditional pure play broker introductory broker,” Friedman said. “It’s more of, we introduce you, we also do the underwriting, and by the way, we eat our own cooking.
“Insurance companies worry about anti selection and the MGA model really incentivises the distribution partners to bring profitable business and price appropriately.”
In the current environment and in the aftermath of the US Department of Justice’s (DOJ) 2021 scuppering of Aon’s attempt to go for “gold” with its US$30 billion WTW mega-deal Friedman predicted that another attempt at the “big getting bigger through massive acquisitions” is unlikely this year.
Aon announced a US$13.4 billion swoop for middle-market broker NFP late last year, with the former set to remain the second largest global insurance broker post-deal behind Marsh McLennan, which cemented its place in pole position in 2019 with its US$5.6 billion purchase of JLT.
WTW, which has not discounted a return to the space, sold reinsurance arm Willis Re to Gallagher in 2021 despite the failed Aon merger.
