Insight

Insurance

The race to remake business models

Ram Menon

Ram Menon

Partner, Global Head of Insurance, Advisory, KPMG US

+1 212-954-3448

Over the past few years, the nature of M&A in the U.S. insurance industry has shifted. Insurance carriers are increasingly exploring strategic opportunities to release capital (via divestitures of low-return and sub-scale business segments) and redeploying that capital (via acquisitions) to refocus their growth strategies in relatively less capital intensive business segments, in a continuing low interest rate environment. Large multi-line insurers are divesting businesses, such as individual life and annuity blocks of businesses, to focus on capital-light businesses. Private-equity players are frequently the buyers of the old businesses— exploring opportunities to leverage their asset-management capabilities to generate higher yields on their investment portfolios.

This trend has continued in Q3’21. In July, Prudential Financial sold its retirement business to Empower for $3.6 billion. In Prudential’s announcement, Chairman Charles Lowry said, “Today’s announcement is a significant milestone in Prudential’s transformation and the execution of our strategy to become a higher growth, less market sensitive, more nimble business,"1

Behind many deals is an industry-wide “rethink” of insurance strategy, which applies to life, P&C, and commercial. The strategic rethink is driven by the quest for higher returns on capital as well as the need to keep up with evolving customer preferences. Profitability overall has been challenging with declining net investment yields in both life and P&C over the last decade, due to persistently low interest rates.

The rethink is playing out on four fronts:

Business model transformation

For many insurers, true transformation begins with redefining core value propositions, brands, and products. Some are pursing innovative revenue models while rationalizing portfolios and evaluating adjacent markets.

Operating Model modernization

Insurers will need new capabilities to outperform in the decade ahead, including end-to-end digitization, advanced analytics, automation, and robotics. New approaches to talent management will be essential; many carriers will rely more heavily on outsourcing and managed services to streamline in-house operations.

Enhancing customer & stakeholder engagement

Digitization of customer- and agent-facing systems is becoming essential. Insurers need to provide customers, agents, vendors, and other key stakeholders with seamless digital experiences and offer more customized, secure, and convenient solutions.

Innovation at scale

Carriers will gain competitive advantages by harnessing emerging technologies and driving innovation from underwriting and distribution to claims-handling. Many will partner with emerging players within the insurtech ecosystem.The strategic rethink is driving continuing investments in insurtech companies and technology. In just the last 18 months, investments of more than $14 billion have flowed into the insurtech ecosystem, and the number of transactions hit an all-time high of 377 in 2020. Through the first half of 2021, there were 200 such deals. In August, for example, Corvus Insurance, which uses AI risk assessment technology to provide smart commercial insurance products, acquired Wingman, an insurtech platform. Goals include accelerating growth and moving into multiple insurance product lines.

Read our KPMG Q3 report from M&A Trends in Financial Services summarizing recent developments in the financial services deal market.

Footnotes

  1. Source: Bloomberg, “Empower Retirement to Acquire Full-Service Retirement Business of Prudential Financial, Inc.,” July 21, 2021