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The Environment for M&A in Insurance

Insurance M&A remained very robust in 2016 after record activity in 2015. There were 482 announced transactions in the industry for a total disclosed deal value of $25.5 billion. The primary drivers of deals activity were Asian buyers eager to diversify and enter the U.S. market; divestitures; and insurance companies looking to expand into technology, asset management and ancillary businesses.

We expect continued strong interest in M&A, driven primarily by inbound investment. In addition, bond yields have spiked over the last few months and are likely to continue to increase. Combined with expected rate hikes by the Federal Reserve, this should have a positive impact on insurance company earnings and, in turn, will likely encourage sales of legacy and closed blocks.

However, a new U.S. president has caused tax and regulatory uncertainty that may temporarily decelerate the pace of deal activity. President Trump is expected to prioritize tax reform and changes to U.S. trade policy, both of which will have potentially significant impacts on the insurance industry. Moreover, the latest Chinese inbound deals have drawn regulatory scrutiny, and there is skepticism in the U.S. stock market about the ability to obtain regulatory approval.

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Insurance activity remains high

While M&A activity declined somewhat in 2016 compared with 2015’s record levels (both in terms of deal volume and announced deal value), activity remained high. In fact, announced deals and deal values exceeded 2014’s levels.

Major deal trends included:

  • Asian insurers seeking to grow their footprint in the U.S. continued in 2016. Japan’s Sompo Holdings agreed to acquire Endurance Specialty for $6.3 billion, and China’s Oceanwide’s announced its acquisition of Genworth Financial for $2.7 billion.
  • Domestic companies’ expansion into new lines of business also drove deal activity, as evidenced by Liberty Mutual’s announced acquisition of Ironshore for $3 billion and Fairfax Financial’s announced acquisition of Allied World for $4.9 billion.
  • U.S. insurers, including AIG and MetLife, sought to divest noncore legacy businesses. AIG sold its mortgage insurance business, United Guaranty, to Arch Capital for $3.4 billion, and MetLife sold its retail advisor force to MassMutual, and MetLife plans to divest its consumer unit.
  • Insurers have been focused on expanding into new technology- enabled markets and products and, in many instances, are seeking to do so via acquisition. Allstate announced its acquisition of SquareTrade, an extended warranty service provider for consumer electronics and appliances, for $1.4 billion. Another example is Intact Financial’s investment in Metromile, a company that offers pay- per-mile insurance.
  • Deal volume in the insurance brokerage space continues apace. Brokerage deals, most notably the management-led buyout of Acrisure for $2.9 billion, accounted for 84% of total deal volume.

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Deals market characteristics

  • Drivers of consolidation include the difficult growth and premium rate environment. In particular, there has been continuing consolidation among Bermuda insurers, notably the acquisitions of Allied World1, Endurance and Ironshore.
  • Asian insurers remain interested in expanding their U.S. footprint and accounted for two of the top-10 transactions.
  • There has been expansion in specialty lines of business, as core businesses have become more competitive. This is evidenced by:
    • Arch’s acquisition of mortgage insurer United Guaranty, which becomes its third major business after P&C reinsurance and P&C insurance;
    • Allstate’s acquisition of consumer electronics and appliance protection plan provider SquareTrade, which should enable Allstate to enhance its consumer-focused strategy;
    • Berkshire Hathaway subsidiary National Indemnity’s agreement to acquire Medical Liability Mutual Insurance Company, the largest New York medical professional liability provider (a deal that is expected to close in 2017); and
    • Fairfax Financial’s December 2016 announcement of a $4.9 million acquisition of Allied World, which the Ontario Municipal Employees Retirement System (OMERS), one of Canada’s largest pension funds, is contributing $1 billion in financing toward the acquisition (the deal is expected to close in 2017.)
  • The insurance brokerage deals space remains active and saw two of the top-10 deals.
  • Many acquirers are scaling up to generate synergies, as evidenced by Assured Guaranty and National General Holdings.
  • Insurers continue to grow their asset management capabilities. For example, New York Life Investment Management expanded its alternative offerings by announcing a majority stake in Credit Value Partners LP in January 2017, and MassMutual acquired ACRE Capital Holdings, a specialty nance company engaged in mortgage banking.

Sub-sector highlights

Asian buyers diversifying their revenue base has had an impact on the life and annuity sector; regulations including the Fiduciary DOL Rule and the SIFI designation; and divestitures and disposal of underperforming legacy blocks (specifically, variable annuity and long term care).

The P&C sector has been experiencing a challenging pricing cycle, which has driven carriers to: 1) focus on specialty lines and specialized niche areas for growth and 2) consolidate. Furthermore, with an abundance of capacity and capital, the dynamics of the reinsurance market has changed. Reinsurers are trying to adjust by turning to M&A and innovating with new products and in new markets.

There has been a wave of insurance broker consolidation, largely because of the current low interest rate environment, which translates into cheap debt. The next wave of consolidation is likely to affect managing general agents because they have flexible and innovative foundations that set them apart from traditional 9% underwriting businesses.

According to PwC’s 2016 Global FinTech Survey, insurtech companies could grab up to a fifth of the insurance business within the next five years. In response, insurers have set up their own venture capital arms, typically investing at the seed stage, to keep up with new technologies and innovations and find ways to enhance their core businesses. Investments by insurers and their corporate venture rose nearly 20 times from 2013 to 2016.

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Implications

  • Sale of legacy blocks: There is a continuing focus on exiting legacy risks such as A&E, long-term care, and variable annuities by way of sale or reinsurance. Already this year, there have been two significant transactions announced: AIG is paying $10 billion to Berkshire for long-tail liability exposure, and The Hartford is paying National Indemnity $650 million for adverse development cover for A&E losses.
  • Expansion of products: P&C insurers are focusing on expanding into niche areas such as cyber insurance, and life insurers are focusing on direct-issue term products.
  • Technology: Emerging technologies — including automation, robo-advisers, data analysis and blockchain — are expected to transform the insurance industry. Incumbents have been responding by directly investing in startups or forming joint ventures to stay competitive, and they will continue to do so.
  • Foreign entrants: Chinese and Japanese insurers have a keen interest in expanding to the U.S. market because of limited domestic opportunities and have the desire to diversify products and risk and expand capabilities.
  • Private equity/hedge funds/family offices: Non-traditional investors have a strong interest in expanding beyond the brokers and annuities businesses to other areas within insurance (e.g., MGAs).

Insurance M&A Stays Active in 2016

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.