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August 24, 2016

Insurance M&A Stays Active in 2016

Summary:

Momentum should pick up from small to medium-sized companies, as they are focused on building much-needed scale and complying with regulation.

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Insurance M&A markets remained active in the first half of 2016 despite the lack of mega deals. The largest transaction this year was BB&T Corp. acquiring wholesale insurance broker Swett & Crawford for $500 million in cash from London-based Cooper Gay Swett & Crawford.

On a relative basis, the announced deal activity and value declined compared with 2015, where we saw a record number of transactions in the sector. 2015 was a transformative year in the insurance sector, with several mega deals, including ACE Ltd.’s acquisition of Chubb Corp. for $28 billion, Tokio Marine acquiring HCC Insurance Holdings for $7.5 billion and Meiji Yasuda Life acquiring StanCorp Financial for $5 billion.

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  • Deal volume remains strong, with 232 announced deals in 1H 2106, 87% of which were composed of insurance brokers.
  • There was a slight decline in transaction multiples with the median price-to-book multiple for insurance deals at 1.8x vs. 1.6x in 2H 2015.
  • There were no mega deals (deals more than $1 billion) announced during 1H 2016. The largest deal announced was $500 million.

Highlights of 1H 2016 deal activity

Insurance Activity Remains High: U.S. insurance deal volume had been steadily increasing since 2013. While volume remained high in 1H 2016, it has declined compared with the same period in 2015. Announced deal values in 1H 2016 were nowhere close to the record levels seen in 2015.

Significant Transactions: BB&T announced its acquisition of Swett & Crawford Group, growing its wholesale brokerage business in the U.S. Massachusetts Mutual announced its acquisition of MetLife’s U.S. retail adviser force, allowing the expansion of its U.S. client base. MetLife chose to divest in response to the looming Department of Labor fiduciary rule.

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Key Trends and Insights

Sub-sectors highlights

  • The persistent low interest rate environment has weighed on life insurers’ investment portfolios. Furthermore, the unprecedented U.K. vote to break away from the EU increased the volatility of both the U.S. dollar and the euro value relative to the pound, and it decreased the likelihood of near-term rate increases by the Fed. Last year, major deals involved the largest Chinese and Japanese life insurers venturing out of their home markets. While Asian investors still have an active interest in expanding, regulatory uncertainty remains for Chinese buyers pending the resolution of the announced Fidelity & Guaranty Life acquisition. We expect momentum to pick up from small to medium-sized companies, as they are focused on building much-needed scale and the need to comply with enhanced regulations.
  • The insurance broker segment continues to be the most active in terms of deal volume. This year, we have seen the five most active regional brokers to be Hub International, AssuredPartners, Arthur J. Gallagher, Confie Seguros California and Acrisure.

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Conclusion and Outlook

We expect activity to intensify for the remaining part of the year as insurers are focused on the disruption to their businesses because of technology, adapting to an evolving regulatory landscape and an uncertain macroeconomic environment.

  • Technology: According to the 2016 PwC Global FinTech Survey, 21% of insurance business is at risk of being lost to standalone InsurTech companies within five years. The rise of shared mobility, the “gig” economy, robotics and sensors are disrupting several areas of insurance. Incumbents have been responding by direct investment in startups or by forming joint ventures to stay competitive. Recent examples include ACE’s investment in CoverHound and Marsh’s acquisition of Dovetail Insurance.
  • Macroeconomic environment: The global market volatility, persistent low interest rates and the uncertainty around Brexit continue to constrain insurers’ revenues and profitability. Life insurers have used both divestitures and acquisitions to manage the damaging impacts of the low-return environment and transform their business models. There is renewed interest in diversifying asset management capabilities by way of acquisitions.
  • Regulatory environment and shareholder activism: Increased scrutiny and uncertainty have heavily influenced insurers’ business models and strategies, forcing many to exit businesses. The recent DOL fiduciary rule continues to be an obstacle for life/annuity insurers, as it can cause insurers that use exclusive agents to evaluate their product offerings and firm structure. Recent examples include MetLife shedding its U.S. adviser unit to Massachusetts Mutual Life Insurance and AIG selling its Advisor Group to Lightyear Capital and PSP Investments. AIG continues to simplify its organization, in part because of the aggressive stance from activist investor Carl Icahn.
  • Foreign entrants: Asian insurers — specifically Japanese insurers looking for growth and Chinese insurers seeking diversification — have a continued interest in U.S. and European insurers.
  • Private equity/hedge funds/family offices: Non-traditional firms have maintained strong interest in runoff, long-tail liabilities. They have expanded beyond insurance brokers and the annuities business to include other sectors within insurance, including managing general agents.

About the data: The information presented in this report is an analysis of deals in the insurance industry (excluding managed care) where the target company, the target ultimate parent company was located in the U.S. Deal information was sourced from S&P Global Market Intelligence and includes deals for which targets are: Insurance underwriter and insurance broker (multiline, property and casualty, life and health, title, mortgage guaranty and financial guaranty). Certain adjustments have been made to the information to exclude transactions that are not specific to the sector or incorporate relevant transactions that were omitted from the indicated mid industry codes. This analysis includes all individual mergers, acquisitions and divestitures for disclosed or undisclosed values, leveraged buyouts, privatizations and acquisitions announced between Jan. 1, 2014 and June 30, 2016, with a deal status of completion, definitive agreement or non-binding letter of intent. Percentages and values are rounded to the nearest whole number, which may result in minor differences when summing totals.

This article was also written by Mark Friedman, Christopher Gaskin and Ritendra Roy.

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About the Author

John Marra is a transaction services partner at PwC, dedicated to the insurance industry, with more than 20 years of experience. Marra’s focus has included advising both financial and strategic buyers in conjunction with mergers and acquisitions.

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