A highly flirtatious sentiment within the insurance industry

M&A activities in the insurance industry are on the rise. Brokers, insurtechs, but also established insurers are joining forces. The reasons are manifold.

A highly flirtatious sentiment within the insurance industry

Mergers and Acquisitions (M&A) activities in the insurance industry are on the rise, and the reasons behind this trend are diverse. In the still highly fragmented German insurance market, discussions about consolidation have been ongoing for decades. However, for the most part, little to nothing happened. In recent times, though, there is movement in the market, and M&A activities are on the rise. A recent highlight was the announcement three weeks ago by Gothaer and Barmenia of their plans to merge. It would be the largest merger of two insurers in Germany since numerous failed attempts that lead up to the eventual success of the 2020 merger of two public insurers in North Rhine-Westphalia, Provinzial Rheinland and Provinzial Nordwest.

But acquisitions are also happening in other corners of the insurance industry. In the insurtech scene, in September, Getsafe announced that it would be taking over the German portfolio of Luko. The French start-up had only acquired the Berlin-based digital insurer Coya at the beginning of 2022.

The wheat is slowly separating from the chaff in insurtech

In the insurtech scene, tighter investor budgets are driving consolidation, as well as the lack of success of some startups that struggle to establish their business model in the market. There, the wheat is slowly separating from the chaff.

Among established insurance companies, the motivation has changed. Concerns about insufficient solvency capital have dissipated with the shift in interest rates. Reiner Will, CEO of the rating agency Assekurata, now identifies something else as a potential driver of M&A: “All companies are under cost pressure, especially when it comes to IT systems.” On the one hand, it's about legacy systems, especially in life insurance, but also about the upcoming high investments in digitalization, AI, and automation. These can sometimes be better managed in a larger company.

Run-off sales are encountering obstacles

Many industry observers believe that the issue of legacy systems in life insurance could inject new momentum into the sales of portfolios or entire companies to external run-off platforms. Currently, this niche market is facing regulatory concerns. The flagship deal of selling around 700,000 policies from Zurich Germany to the run-off specialist Viridium is hanging in the balance. According to media reports in September, it is on the verge of collapse because Viridium's majority shareholder, Cinven, had an inglorious role during the rescue of the Italian life insurer Eurovita that it controlled. Reportedly, BaFin has concerns due to this. According to reports, Cinven now wants to sell the majority of Viridium. Goldman Sachs and Fenchurch are said to be looking for potential buyers, as per Reuters.

The advancing requirements of regulatory authorities can also fuel consolidation. “Regulatory requirements can be better managed in larger entities,” says Reiner Will, CEO of Assekurata. The regulatory pressure should not be underestimated. In recent years, the ESG sector alone has meant a significant additional workload. Furthermore, there is the newly introduced EU regulation, DORA (Digital Operational Resilience Act), which sets a framework for how the financial sector should guard against cyber risks. “This is a mammoth task,” observes Will.

Mergers put participating companies to a tough test

Such considerations, of being better positioned in a larger entity, are also at the forefront of the most recent and largest merger project in the industry. “We are increasing our investment capacity and risk-bearing capacity,” said Andreas Eurich, CEO of Barmenia, when announcing the planned future together with Gothaer.

Even though the advantages are evident, mergers always put the participating companies to a tough test. The challenges are diverse, and dealing with a major integration process is known to divert attention from day-to-day operations. In the case of Gothaer and Barmenia, it's also legally interesting. Two insurance associations want to merge, which is rare in Germany. A more ambitious endeavor in terms of scale, the merger of HUK-Coburg and HDI, had failed some years ago.

Prospects looking promising on paper

In the case of Gothaer and Barmenia, however, the prospects look quite promising on paper. In addition to their geographical proximity between Wuppertal and Cologne, there are complementary business focal points as well as shared values such as sustainability, which are strongly emphasized in both companies.

The legal complexity in the case of Gothaer and Barmenia is also manageable, according to Gunbritt Kammerer-Galahn, Partner and Head of the Insurance Team at Taylor Wessing. “While M&A transactions in the mutual insurance sector can be challenging and, for example, demutualizations – the conversion of associations into stock corporations – can be extremely complicated, it is easier here.” This is because Gothaer had already prepared itself organizationally for possible mergers years ago and established a financial holding in the form of a stock corporation (AG) under the mutual insurance model to hold the shares in the individually operating entities. According to the companies, the two insurance associations of Barmenia will hold shares in Barmenia Gothaer Finanzholding alongside Gothaer's mutual insurance association.

With premium income of approximately 8 billion euros this year, the combined insurance group aims to break into the top ten in the German market. The plan is to complete the closing in the third quarter of 2024.

Lively M&A activity throughout Europe

The enthusiasm for mergers in the insurance industry is not limited to Germany. In a recent study, the US consulting firm FTI Consulting observed a lively M&A activity throughout Europe in the first half of 2023. The analysts counted a total of 267 transactions, significantly more than in the first halves of previous years. The largest deal was the acquisition of Liberty Mutual's business on the Iberian Peninsula by the Italian industry giant Generali for 2.3 billion euros.

However, the vast majority of these transactions are acquisitions of brokerage firms. There has been a wave of corporate acquisitions and mergers in this sector for several years. This trend is also evident in the German-speaking region. Of the 26 transactions counted by FTI Consulting in the DACH region in the first half of 2023, 23 involved brokers and other service providers. While the insurance company market, with over 500 companies supervised by BaFin, is considered fragmented, the brokerage segment is even more so, with over 15,000 registered brokerage firms in Germany.