Pathway to distinctive performance: M&A options for European insurers

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After nearly three sluggish years, the European insurance sector may be poised for a resurgence of mergers and acquisitions. Deal making was already in a cyclical lull in 2019, which had the fewest deals of the decade. In 2020, with the emergence of the pandemic, M&A activity continued to be quite low through the first nine months. But starting in the last quarter of 2020 and continuing throughout 2021, there have been signs of a recovery.

On average, the insurance industry has struggled to achieve returns above cost of capital. M&A, especially with a programmatic approach, can increase the odds of improving returns and successfully address the trends accelerated by the pandemic. In this report, we identify five strategic actions that can shape M&A approaches to help insurers prosper: consolidation to unlock synergies, divestiture of noncompetitive positions, improvement of access to growth, development of cutting-edge capabilities, and the building of ecosystem positions.

On average, the insurance industry has struggled to achieve returns above cost of capital.

Recovery from pandemic impact

The COVID-19 pandemic had a significant negative impact on Europe’s insurance industry valuations, leading to declines of as much as 30 percent. Operational performance was also affected. By volume, new business premiums fell by 25 to 50 percent for many players in 2020. The pandemic’s effect on claims was, nevertheless, mixed. For example, claims against motor insurance policies decreased in frequency as lockdowns prevented mobility, while business interruption claims surged.

In the meantime, European insurance equity indexes have largely recovered and are already above prepandemic levels. The region’s economic trajectory began trending toward recovery, avoiding large-scale distress that could have severely affected insurers’ balance sheets. Nevertheless, the insurance industry falls behind the trajectory of economic sectors such as software and e-commerce, which experienced significant appreciation of market valuations throughout the pandemic. In fact, the insurance industry faces increasing pressure to adapt its business model to trends that predated and have been accelerated by the pandemic—such as the growth of digital behaviors, the expansion of ecosystems, and the provisioning of remote services, including telemedicine. Successfully addressing these trends will require big strategic moves in domains such as technology, talent, and digital. Additionally, a scenario of persistently low interest rates remains possible, constraining the industry’s ability to achieve investment returns and demanding better operational performance and efficiency.

Recent M&A activity and catalysts

The total value of European deal making hit record lows in 2019, a year that also saw the second-smallest number of deals since 2008 (Exhibit 1). M&A activity remained slow in the first nine months of 2020 but accelerated in the last quarter of the year. The combined enterprise value of 2020 deals was double that of 2019, but 50 percent of this value can be attributed to one mega transaction: the $10 billion RSA Insurance Group deal.1 In 2021, deal making continued its recovery trend of the last quarter of 2020.

M&A insurance activity declined dramatically in 2019 before starting to recover in the fourth quarter of 2020.

During the pandemic period, certain deal profiles have stood out (representing more than 60 percent of the deal flow from 2020 through the third quarter of 2021).

  • Streamlining portfolios. Large European insurers sought to simplify their footprint and refocus on core geographies and segments after a historically expansionary trend. For example, Aviva exited its businesses in France, Italy, and Poland, and AXA sold its entities in the Czech Republic, Greece, Poland, and Slovakia, part of a broader strategy in which it acquired XL Group. Most of the assets sold presented second-tier positions in their respective markets and were acquired by players aiming to consolidate their existing businesses.
  • Banks repositioning their insurance models. Banks have been making changes to capture the full potential of their customer relationships in the bancassurance category by entering new alliances that improve their ability to provide a compelling suite of insurance products and to release capital to strengthen their balance sheet positions. Many of these deals materialized in Southern Europe—for example, in Spain, where BBVA sold a stake in its captive insurer to Allianz, and in Greece, where NBG sold 90 percent of its position in Ethniki to CVC Capital Partners.
  • Private-equity deals. Private-equity (PE) players have been focused in life insurance portfolios (for example, Bain Capital’s attempted acquisition of the UK insurer Liverpool Victoria [LV=]), in an attempt to take advantage of their investment capabilities, culture, and skills to build efficient operational models. Additionally, PE players have been actively investing in insurance brokers, supporting roll-up strategies in certain circumstances—for example, Cinven’s acquisition of Miller. PE’s presence is especially notable in France and the United Kingdom.

What’s next for EU insurers?

With the end of the pandemic in sight, insurers are contemplating their strategic options. There is evidence that a programmatic approach to M&A2—that is, having an explicit strategy for continual deal making—can be an effective path. According to our research, insurers implementing at least two small to midsize deals per year delivered 3.3 percentage points in excess total returns to shareholders in the decade before the pandemic (based on the M&A activity of the largest global companies, the Insurance Global 2000) (Exhibit 2). Allianz stands out for this profile in the period analyzed, with a track record of bolt-on acquisitions in many markets, which have continued in the recent period, for example, in Italy and Poland.

A programmatic approach to M&A in insurance delivers higher excess total shareholder returns.

There is evidence that a programmatic approach to M&A—that is, having an explicit strategy for continual deal making—can be an effective path.

Insurers can structure programmatic deal strategies along five strategic actions to increase their odds of beating market performance and of future-proofing their business models: consolidating to unlock synergies, mostly with same-market players; divesting noncompetitive positions by exiting subscale or low-return positions; increasing access to growth by gaining weight in domains with tailwinds; developing cutting-edge capabilities by strengthening skills in innovative areas; and building ecosystem positions by expanding into adjacencies. Recent activity has focused primarily on the first two topics, but trends accelerating as a result of the pandemic may increase the importance of the remaining themes.

  • Consolidate to unlock cost synergies. Some sizable European markets still have potential for further consolidation. In France, Germany, and the United Kingdom, for example, the top five largest companies control roughly 50 percent of nonlife premiums (Exhibit 3). In midsize markets, such as Italy and Spain, there still seems to be room for increased concentration. Players acting on this opportunity can aspire to capture cost synergies that can represent approximately 10 to 20 percent of operating costs or 1 to 2 percent of claims procurement costs, depending on the relative size, overlap of business lines, distribution mix, and business practices between merged entities. Revenue synergies tend to be less frequent and harder to capture but can also occur, mostly related to cross-selling opportunities.
Nonlife insurance markets in Europe are fragmented.
  • Divest noncompetitive positions. Companies lacking an upper-ranking position in at least one business line or channel, especially in smaller or midsize European markets, often face performance gaps and struggle to achieve competitive advantage. This increases the odds that someone else might be a better “natural owner” of that business. Large European insurers have been proactive in both divesting and pursuing further consolidation (Exhibit 3).

    Additionally, certain business portfolios may find achieving sustainable returns particularly complex. Such is the case with life books, which became even more vulnerable with the prolonged environment of ultralow interest rates in Europe. This reality exacerbated the difficulty of managing these books, which face challenging structural costs as well as a capital regime—Solvency II in the EU3—imposed higher capital charges for guaranteed books. Depending on portfolio profiles and insurer capabilities, selling these portfolios may unlock access to the actions required to improve performance in, for example, operations and IT, investment management, capital and technical excellence, or commercial levers.

  • Increase access to growth. Growth is scarce across most European markets, which tend to present higher levels of insurance penetration. One way to accelerate growth is to invest in the few domains that benefit from market tailwinds, whether from a geographic, segment, channel, or business line perspective. For example, in nonlife, bancassurance has been matching this profile, as banks increasingly explore the full potential of their captive customer base and go beyond the traditional model of sales associated with lending. Banks’ willingness to revisit partnerships may provide relevant opportunities to tap into this space. From a business line perspective, the industry is relatively mature across most products, which limits the solution space. For example, health insurance stands out in some markets, such as Spain, showing attractive growth rates.
  • Improve access to cutting-edge capabilities. Insurers need to inject new skills and practices into their organizations to successfully navigate opportunities emerging in new areas, such as digital sales, analytics, and automation. Acquiring stakes in insurtechs can help address this need. Insurtech funding levels in Europe have grown rapidly during the pandemic: the second half of 2021 has already surpassed the record-breaking year of 2020. The opportunities in this space span the value chain, including end-to-end direct attackers, distribution platforms, claims management software, and data providers. Setting up dedicated units to invest in these opportunities is one option to materialize this path, increase focus, and ensure the right talent.
  • Build ecosystem positions. Nearly half of European insurers are considering becoming part of an ecosystem—a network of related products or services enabling an integrated customer experience benefiting from common technological or data platforms, a high priority in the next two years—and nearly a quarter of their peers claim to already be part of one. Insurers have been particularly active in the domains of mobility, healthcare, home, and wealth and are expanding into services provisioning. Orchestrating or participating in an ecosystem can offer a path toward attracting new customers, finding new revenue streams, or increasing recurring customer relationships, which can result in benefits in cross-selling, customer loyalty, or claims management. M&A can accelerate the development of such ecosystems by enabling control of pivotal assets with unique value propositions or access to a sizable installed customer base that can foster scale effects.

From idea to implementation

Most insurers need to build their M&A muscle to be successful. Data shows that more than 50 percent of insurers in the top 100 players by market capitalization have had a very limited track record in the period from 2016 to 2021. As European insurers consider increasing their use of M&A, they should keep in mind the following practices:

  • Shape an M&A blueprint. Ensure that M&A activity is anchored in strategy to enable a programmatic approach, with a clear view on why and where M&A is used as the lever of strategy implementation. Programmatic acquirers frequently review their strategic intents and potential targets for M&A, which helps them be more proactive, build conviction for targeted deals, act quickly when opportunities emerge, and have both a clearer view on deal upside and a narrative for potential targets, shareholders, and other stakeholders.
  • Evaluate deal opportunities thoroughly. For deals that match the M&A strategic blueprint, insurers should rigorously explore value creation sources and differentiate competitive advantages to generate compelling proposals that can win in fierce processes. Often transactions are assessed in a superficial way if compared against internal decisions and considering their larger scale.
  • Create the capabilities for success. Effectively pursuing an M&A strategy requires financial, talent, and organizational capacity across deal stages, from blueprint to due diligence and final integration. Programmatic acquirers tend to be more effective because they can reuse practices, increasing their reach and potential returns. Best-practice acquirers invest in growing a team of professionals who can be mobilized to ensure value creation in mergers. Critical capabilities in such teams include valuation and synergies assessment; at-scale program management; culture, talent, and technology integration expertise; and operating model design.

M&A—if done in a programmatic way—can be a useful tool to help insurers achieve attractive returns and prepare their business models for the future. A few strategic actions stand out as relevant for success: consolidating to unlock synergies, divesting noncompetitive positions, improving access to growth, developing cutting-edge capabilities, and building ecosystem positions. Organizations that craft a tailored M&A blueprint, thoroughly assess value creation options, and create relevant capabilities are most likely to succeed.

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