This comes as insurers face an uphill battle to maintain returns on their capital. Challenges include distribution models, outdated technology, increasing dependence on asset management fees, regulatory constraints, improving tax positions and the clear need to achieve greater cost efficiency. Persistently low interest rates add to the headwinds.
Combined, these forces are driving management teams to scrutinize their balance sheets and re-evaluate business units within their portfolios even more closely.
Shifting to a simplified, digital future state
At the same time, the pandemic reinforces the long-standing need for insurers to shift to better, more forward-looking models that emphasize a superior omni-channel customer experience and more efficient cost base.
Moving to this attractive future state requires insurance leaders to make difficult decisions on which businesses to divest. But an appetite for change is evident across the sector: almost two-thirds of insurers in the 2021 EY Global Corporate Divestment Study expect to initiate a divestment within the next two years, with nearly a third (29%) in the coming 12 months.
A clear benefit of taking action will be liberating management time from non-core areas and legacy practices. Capital from divestment proceeds can be reallocated toward higher-return businesses that are core to the renewed strategy, while cash flow will be freed by reducing complexity and the overall cost base. All of these will support focused efforts to build simplified, digital-first insurers.
Such a strategy involves committing time and attention to developing a robust vision of a streamlined, sustainable operation. Management needs to embrace the idea that the future business will be a company repositioned and refocused to drive higher growth — not simply a smaller one where divestment has helped to fund digitalization. The move to digital engagement and products, even beyond insurance, requires significant technology investment — and will create a sector very different from the past.
Preparing for PE demand and risk appetite
While synergy-driven deals between incumbents continue, insurers regardprivate equity(PE) as the likeliest buyer of their divestments — sometimes with sovereign wealth funds as co-investors. About half (44%) of companies in the insurance industry anticipate selling to PE, compared to just 19% who expect foreign emerging markets financial institutions as a likely buyer.
This is especially true of the life insurance subsector, where PE-backed consolidators continue to experience above-market growth. Even though PE investments in insurance can be risky, the sector’s ample capital and attractive fee model are seen as positives.
Insurance leaders should make use of PE appetite by reviewing their portfolios and determining business by business (or block by block) where they remain the best stewards. Where they do not, strategic deals make more sense.
In these cases, insurers need to create value stories that appeal to the PE buyer group and package non-core assets as stand-alone businesses or with very clear, ongoing commercial arrangements. They should also keep in mind that this buyer group uses an array of deal models from traditional reinsurance to carve-outs.
While insurance is a regulated sector that makes significant demands of owners, PE firms are credible buyers. They have demonstrated track records of respecting the interests of policyholders in many markets.
Nonetheless, management working with PE bidders must also allow for pre-emptive early consultation with regulators. If stakeholders react negatively to the prospective transaction, potential reputational risks will have to be managed also.
Managing multiple options to maximize price tension
While PE buying is on the rise, insurers seeking to divest should look to benefit from competitive tension between multiple buyer groups. This potentially also includes foreign (both emerging and developed market) and domestic buyers from within the sector, as well as non-regulated financials and “convergent” technology players.
Insurance divestments can take multiple forms, all of which are on the table to achieve the desired outcome and expand proceeds to be redeployed for strategic growth of the core business:
- JV/industry utility
- Classic sale
- Special purpose acquisition company/IPO
- Reinsurance agreement
- Closed book sale
Significantly more insurers expect divestments across various deal types to increase over the next 12 months than those who see them declining. Ten times as many anticipate growth in JV or industry utility deals, for example.
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While this multiplicity provides a supportive backdrop, how should insurance CEOs address the challenges it also brings? The key is highly disciplined strategic reviews. Understanding the many potential deal options is essential too, since these are harder to manage than when fewer options are in play.
CEOs should also evaluate those deal options by assessing the shareholder returns of a potential deal. Keep in mind that strategic or financial buyers will likely require different deal arrangements from trade buyers.
Connecting to a supportive ecosystem
A productive repositioning route that insurers are considering is the ecosystems approach. This involves engaging with InsurTechs and other collaborators to innovate and raise margins while reducing costs.
Early adopting insurers are already using these kinds of collaborative arrangements to drive new growth and deepen customer relationships.
They achieve these benefits by pooling complementary capabilities — technology and distribution, most obviously. This has the potential to create greater value than any one alliance could achieve.
Ecosystems approaches require CEOs to have strategic clarity over the portfolio and what’s core versus non-core. Besides divestments, this can involve shifting non-core tasks outside the company through outsourcing, offshoring and/or strategic alliance delivery.
Creating ecosystem solutions may also require management to be open to collaborating with the competition.
Despite the insurance sector’s reputation as slow moving and reactive, this kind of imaginative response is gaining traction. Over 70% of insurers cite a joint venture or industry utility as the rationale for their last divestment.
An even higher proportion say that they are open to the once unthinkable step of working with competitors — though many also see themselves controlling the venture, an old-fashioned stance that misreads the leadership or orchestration role that ecosystems approaches require.
Recommendations
- Review the portfolio rigorously and with strategic clarity to determine where divestments could support step changes in key areas — digital capability and effective customer engagement
- Aim for the future business to be a refocused company repositioned to drive higher growth
- Consider how collaborating ecosystems could spark additional sources of growth and deepen customer relationships
Conclusion
As the insurance sector responds to the challenge of a host of secular shifts, divestments and ecosystem collaboration provide crucial avenues for change. Each requires CEOs to bring strategic clarity to the portfolio review process. Both offer the potential of repositioning the company for future growth.
Source: Digital Insurance
