The insurance industry faces many challenges as 2020 approaches. New market entrants are intensifying competition and developing capabilities that threaten to erode traditional barriers between lines of business. Expense concerns are paramount in many organizations today: carriers can expect low interest rates across the planning horizon, and investment income gaps are sharpening carrier focus on efficiency. In some circles, efficiency translates to economies of scale.
One such example (that Investment News reported on this week) comes from the defined contribution retirement plan space, where there is a growing interest in consolidating recordkeeping players. Consolidation improves cost competitiveness and allows firms operating at scale to provide different levels of service offerings than would be possible for smaller or regional companies.
Several recent transactions are highlighted here, including Principal Financial’s notable acquisition of the Wells Fargo business. The acquisition included the defined benefit plan assets and executive deferred compensation capabilities, as well as the scale generated on the DC-plan side of the business. The margin is being squeezed on the DC side, which the scale of the merged operations will help to address. Other components in this deal expand the margins of the acquiring company, though the defined contribution plan news may overshadow this fact. Competitors should take note.
Other companies have already started to investigate whether to merge internal operations to create more efficiency and focus their go to market strategies. Prudential and MassMutual brought together group life and DI, voluntary benefits and worksite capabilities, and retirement services plans into unified efforts to address institutional clients. At the same time, big group health carriers (e.g., Cigna) are gearing up to pursue VB and worksite businesses. A critical element of success in the near future may be for companies to ensure they have clear peripheral vision.
On the distribution side, this week saw the announcement of the merger of advisory firms The Advisory Group and Landenburg Thalmann. This merger creates scale and efficiency for a wealth management entity that now has more than 11,000 advisors and over $450B in AUM. This move has the potential to create a differentiated experience in the market.
The Advisor Group/Landenburg Thalmann merger comes in the aftermath of the deal that saw MassMutual Investor Services embark on an effort with Commonwealth Financial to share technology capabilities (i.e., Advisor360). This deal presumably benefits both firms in scaling efforts without a formal merger.
For IT organizations, getting an early understanding of potential M&A activity in the future state plans of their parent companies can be critical to success. IT skills and broader infrastructure investments for organic growth can be very different than what is necessary to address acquisitions with any success. The cost, operational risk, and potential regulatory scrutiny of acquisitions make it a particularly poor place to pursue on-the-job training regimens. My experiences in M&A-oriented companies suggest that building and maintaining key skills in the organization, ensuring that IT is part of early due diligence efforts, and maintaining a playbook for doing transactions were three best practices that allowed us to move quickly and effectively.
M&A activity in the insurance sector is up 13% globally through the first half of 2019; the Americas are the most active market, and the United States is the most active country. 2020 could be very interesting on many levels.
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