Tag Archives: John Marra

U.S. Insurance Deals: Insights on First Half

The U.S. insurance sector announced that deal value has more than tripled to $10 billion in the first half of 2017, compared with $2.9 billion in the first half of 2016.

Activity remains robust in the brokerage sector. The largest announced deal in the period was the acquisition of insurance broker USI by an investor group including private equity firm KKR and Canadian pension fund CDPQ for $4.3 billion.

Among insurers, megadeals have been affected by uncertainty in terms of the direction of tax and regulatory reforms, although some clarity has come by way of the implementation of the Department of Labor’s fiduciary rule.

A healthy appetite for deals should continue in the second half of the year as insurers seek to divest capital-intensive or underperforming businesses, and newly funded PE-backed insurers continue to pursue U.S. insurance sector assets.

Highlights of 1H 2017 deal activity

Evolving nature of deals in 1H 2017

There were only three announced deals valued in excess of $1 billion, amounting to a total of $7.8 billion, in the first half of 2017:

  • An investor group including private equity firm KKR & Co. and Canadian pension fund CDPQ completed a $4.3 billion acquisition of USI Insurance Services from Onex.
  • In a separate deal announced in June 2017, USI agreed to acquire Wells Fargo Insurance Services in a transformational transaction. Terms were not disclosed.
  • In May 2017, a special purpose acquisition company, CF Corporation, including funds affiliated with Blackstone and Fidelity National Financial, announced a $1.8 billion acquisition of annuities and life insurer Fidelity & Guaranty Life. The transaction followed the lapse of Anbang Insurance Group’s agreement to acquire U.S. Fidelity & Guaranty Life after failing to secure the necessary regulatory approvals.
  • Canada’s largest P&C insurer, Intact Financial, acquired specialty insurer OneBeacon from White Mountains for $1.7 billion.

See also: Insurtech: How to Keep Insurance Relevant  

Other significant deals emphasized interest in expanding digital capabilities, specialty offerings and small- to middle-market presence, as well as focus on managing capital, including:

    • An investor group including New Mountain Capital LLC, Achilles Acquisition LLC, acquired small to mid-size employee benefits agency One Digital Health and Benefits for $560 million.
    • Markel Corporation acquired SureTec Financial Corporation for $250 million and renamed its specialty and U.S. insurance segment Markel Surety Corporation.

Deals that did not meet our S&P screening, but are notable for their scale or intent, include:

  • Travelers announced the purchase of U.K.-based Simply Business, a digital commercial broker, for $490 million.
  • Aegon (Transamerica) offloaded its two largest U.S. run-off businesses, payout annuities and bank-owned/corporate-owned life insurance to Wilton Re via reinsurance.

Key trends and insights

Sub-sector highlights

  • Life and Annuity: The sector has been suffering through a persistent low-interest-rate environment that has weighed on insurers’ investment portfolios. Nevertheless, the U.S. Federal Reserve has raised the fed funds rate two times this year, and there are signs that other central banks are considering tighter monetary policies as inflation increases. Opportunities remain for insurers to exit capital-intensive or non-core businesses, with continuing investor interest in closed blocks and narrow concentrations. In a recent reinsurance deal, Canadian pension owned Wilton Re acquired two run-off blocks (annuities and COLI/BOLI) from Aegon/Transamerica.
  • Property & Casualty: Deal activity declined in the first half of 2017, as companies continue to manage macro pressures. However, opportunities remain for small to medium-size companies to build much-needed scale through consolidation.
  • Insurance Brokers: The segment continued to be the most active in terms of deal volume in 1H 2017. The most activity came from several serial acquirers buying regional brokers, further consolidating the market. The five most active acquirers were Hub International, NFP, Arthur J. Gallagher, AssuredPartners and Acrisure.

See also: Insurance Coverage Porn  

Conclusion and outlook

Even though announced deals have been light in the first half of 2017 compared with the second half of 2016, activity should intensify in the remainder of 2017 as insurers focus on cutting costs, achieving scale and enhancing and streamlining or consolidating dated technologies.

  • Macroeconomic environment: The muted economic recovery, persistent low interest rates and geopolitical uncertainty continue to constrain insurers’ revenues and profitability. Life insurers have used both divestitures and acquisitions to manage the low-return environment and transform business models.
  • Regulatory environment: Increased oversight and uncertainty have heavily influenced insurers’ business models and strategies, forcing many to exit businesses, often through divestiture. The current presidential administration appears to favor the easement of certain regulations, which could be a positive for insurers subject to the SIFI rule. Furthermore, the U.S. Department of Labor Fiduciary Rule has officially gone into effect, which may have implications for insurers that use exclusive agents.
  • Technology: Insurers have been slower to adopt new technologies compared with banks and other financial services companies. But the times may be changing; insurers are increasing technology investments, including the recent acquisition of Simply Business by Travelers.
  • Asian inbound interest: The past several years have seen Asian firms expand their footprint in the U.S. insurance market. While Asian investors maintain a global appetite, regulatory and shareholder skepticism remains a hurdle. A bid by Anbang to acquire Fidelity and Guaranty fell through in April, and China Oceanwide’s acquisition of Genworth has yet to close and is facing a new CFIUS review.
  • Canada, too: Closer to home, there is evidence of increased appetite from Canadian buyers. In the first half of 2017, the second largest pension manager in Canada teamed up with KKR & Co. to acquire broker USI Insurance Services, and the largest P&C insurer in Canada, Intact Financial, acquired specialty insurer OneBeacon.
  • Public offerings: Several major global insurers have responded to the low-growth environment in the U.S. with significant divestitures or restructuring. After receiving final approval in June, MetLife plans to spin off its U.S retail business, the new Brighthouse Financial, in August. A.XA announced in May its intention to exit its U.S. operations in a 2018 IPO. There is market speculation that other large insurance companies have similar divestiture or restructuring plans.
  • Private equity/Hedge Funds/Family Offices: Insurance brokerage has historically been the most active insurance subsector for private equity given the limited regulatory environment, straightforward operating model and attractive, leverageable cash flows. However, private equity firms have been entering the life and annuity market with confidence that they are better investment managers than insurers.

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.

See also: Innovation: Solutions From… Elsewhere  

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.

See also: How to Build ‘Cities of the Future’  

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.

See also: Minding the Gap: Investment Risk Management in a Low-Yield Environment  

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).

M&A: the Outlook for Insurers

Mergers and acquisitions in the insurance sector continued to be very active in 2016 on the heels of record activity in 2015. There were 482 announced transactions in the sector for a total disclosed deal value of $25.5 billion. Deal activity was driven by Asian buyers eager to diversify and enter the U.S. market, by divestitures and by insurance companies looking to expand into technology, asset management and ancillary businesses.

We expect the strong M&A interest to continue, driven primarily by inbound investment.

With the election of a new president and the transition of power in January 2017 comes tax and regulatory uncertainty, which may temporarily decelerate the pace of deal activity. President Trump is expected to prioritize the repeal and replacement of Obamacare, tax reform and changes to U.S. trade policy, all of which have unique and potentially significant impact on the insurance sector. Further, the latest Chinese inbound deals have drawn regulatory scrutiny, with skepticism from the stock market regarding their ability to obtain regulatory approval.

Bond yields have spiked over the last few months and are widely expected to continue to increase. The increase in yields should improve insurance company earnings, which is likely to encourage sales of legacy and closed blocks.

Highlights of 2016 deal activity

Insurance activity remains high

Insurance deal activity has steadily increased since the financial crisis, reaching records in 2015 both in terms of deal volume and announced deal value. While M&A declined in 2016, activity remained high, with announced deals and deal values exceeding the levels seen in 2014. In 2015, deal value was driven by the Ace-Chubb merger, valued at $29.4 billion, which accounted for 41% of deal value.

See also: A Closer Look at the Future of Insurance  

Significant transactions

Key themes in 2016 include:

  • Continued consolidation of Bermuda insurers, with the acquisitions of Allied World, Endurance and Ironshore. Drivers of consolidation include the difficult growth and premium environment.
  • Interest by Asian insurers in continuing to expand their U.S. footprint — accounting for two of the top-10 transactions.
  • Expansion in specialty lines of business as core businesses have become more competitive. This is evidenced by (i) Arch’s acquisition of mortgage insurer United Guaranty as a third major business after P&C reinsurance and P&C insurance; (ii) Allstate’s acquisition of consumer electronics and appliance protection plan provider SquareTrade to build out its consumer-focused strategy; and (iii) the agreement by National Indemnity (subsidiary of Berkshire Hathaway) to acquire the largest New York medical professional liability provider, Medical Liability Mutual Insurance, a deal expected to close in 2017.
  • More activity in insurance brokerage, which accounts for two of the top-10 deals.
  • Focus on scaling up to generate synergies, as evidenced by the acquisitions done by Assured Guaranty and National General Holdings.
  • Continued growth in asset management capabilities, as exemplified by New York Life Investment Management’s expanding its alternative offerings by announcing a majority stake in Credit Value Partners LP in January 2017 and MassMutual’s acquiring ACRE Capital Holdings, a specialty finance company engaged in mortgage banking.

Key trends and insights

Sub-sectors highlights

Life & Annuity – The sector has been affected by factors such as Asian buyers diversifying their revenue base, regulations such as the fiduciary rule by the Department of Labor and the SIFI designation, divestitures and disposing of underperforming legacy blocks, specifically variable annuity and long term care businesses.

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

Insurance Brokers – The insurance brokerage space has seen a wave of consolidation given the current low-interest-rate environment, which translates into cheap debt. The next consolidation wave is likely in managing general agents, as they are built on flexible and innovative foundations that set them apart from traditional underwriting businesses.

See also: Key Findings on the Insurance Industry  

Insurtech has grown exponentially since 2011. According to PwC’s 2016 Global FinTech Survey, 21% of insurance business is at risk of being lost to standalone fintech companies within five years. As such, insurers have set up their own venture capital arms, typically investing at the seed stage, in efforts to keep up with the pace of technology and innovation and find ways to enhance their core business. Investments by insurers and their corporate venture arms are on pace to rise nearly 20x from 2013 to 2016 at the current run rate.

Conclusion and outlook

The insurance industry will be affected by the proposed policies of the Trump administration, especially on tax and regulatory issues. Increasing bond yields and the Fed’s latest signal about a quick pace of rate increases in 2017 are expected to improve portfolio income for insurers.

  • Macroeconomic environment: U.S. equity markets have been rallying since the election, with optimism supported by President Trump’s policies to boost growth and relieve regulatory pressures. However, the rally may be short-lived if policies fail to meet investor expectations. While the Fed is widely expected to raise rates in 2017, other central banks around the world are easing, and uncertainty in Europe has spread, with the possibility that countries will leave the euro zone or the currency union will break apart.
  • Regulatory environment: The direction of regulatory and tax policy is likely to change materially, as the president has campaigned for deregulation and reducing taxes. Uncertainty around the DOL fiduciary rule has been mounting even though President Trump has not spoken out on the rule; some of his advisers have said they intend to roll it back. His proposed changes to Obamacare will affect life insurers, but at this juncture it is hard to estimate the extent of the impact given the lack of specifics shared by the new administration.
  • Sale of legacy blocks: Continued focus on exiting legacy risks such as A&E, long-term care and VA by way of sale or reinsurance. In 2017, already, there have been two significant announced transactions, AIG paying $10 billion to Berkshire for long-tail liability exposure and Hartford paying National Indemnity $650 million for adverse development cover for A&E losses.
  • Expansion of products: Insurers will focus on expanding into niche areas such as cyber insurance (expected to be the fastest-growing insurance product fueled by a slate of recent corporate and government hacking). Further, 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 direct investment in startups or forming joint ventures to stay competitive and will continue to do so.
  • Foreign entrants: Chinese and Japanese insurers have keen interest in expanding due to weak domestic economies, intent to diversify products and risk and hope to expand capabilities.
  • Private equity/hedge funds/family offices: Non-traditional firms have a strong interest in expanding beyond the brokers and annuities business to include other sectors within insurance, such as MGAs.

Possibilities for Non-Traditional M&A

2015 was a record year for announced insurance deals, as long-anticipated industry consolidation finally started to occur. Several factors have driven consolidation, notably slow economic growth and persistently low interest rates, both of which have limited opportunities for organic growth and forced insurers to reconsider their long-term competitive strategies. Combined with record levels of corporate capital and private equity funding, these pressures have created the perfect opportunity for both buyers and sellers.

Historically, regulatory or financial pressures have driven insurance carve-outs. [An insurance carve-out is a transaction in which a seller divests part of its business (e.g., a particular customer group, product line or geographic area) rather than an acquirer buying the entire enterprise. The seller typically benefits from exiting sub-scale or unprofitable lines, while the acquirer is able to increase scale or geographic reach.] These pressures typically have included repayment of emergency funding received during the financial crisis, fulfillment of regulatory conditions for receiving state aid, divestment to free up capital and improve solvency ratios in preparation for Solvency II, or the shoring up of capital via asset sales following losses.

In recent years, we have seen the industry move away from complex multi-line business models. Insurers are exiting sub-scale business lines to improve returns and compete in an environment in which technology is disrupting tradition business drivers. There are many insurers considering carve-out transactions or IPOs as sellers, and there are even more looking to build market share by acquiring and consolidating businesses with their existing operations.

See also: Insurance M&A Stays Active in 2016  

However, insurance carve-outs tend to be more complex in both transaction structure and post-merger integration than an acquisition of an entire insurance enterprise, and require careful planning and execution to successfully separate the acquired business (“SpinCo”) from its former parent (“RemainCo”).

What should executives be aware of when they consider these types of transactions?

  • Planning and Organization
    • Confidentiality, maintaining optionality and speed of execution are critical to maximizing deal value.
    • The flexibility to execute deals via alternative structures (described below) helps maintain optionality. In addition, a thorough understanding of the M&A landscape is necessary for sellers to run a competitive sales process and for buyers to understand how to properly position themselves for success.
    • To facilitate speed of execution, executives need to simultaneously focus on multiple priorities, including deal execution, separation planning and negotiation of transitional service agreements (TSAs). Leading practices include having a transaction committee that can rapidly make decisions and a project office that guides the planning effort.
  • Transaction Structures
    • Acquisitions of an entire insurance enterprise typically involve the purchase of all of a holding company’s issued stock. The holding company, its subsidiary legal entities, assets and liabilities, products and licenses, people, technology and infrastructure transfer to the control of the acquirer at close. A carve-out requires a different approach. It is rare that the business being sold is fully contained within a single subsidiary legal entity. More frequently, the business being disposed of is written across numerous legal entities and is mingled with business that is core to, and remains with, the vendor. Therefore, carve-outs typically use a mix of strategies to separate the insurance business of SpinCo from RemainCo:
    • Renewal rights – The acquirer receives an option or obligation to renew the acquired business in its own legal entities.
    • Reinsurance – Renewal rights may be accompanied by reinsurance transferring the economics of the historical book either to the acquirer, to other entities owned by the vendor or to a third party.
    • Fronting – Certain domiciles, such as Japan and the U.S., require regulatory authorization of products or rates prior to their availability to policyholders, and such product approval frequently takes longer than regulatory approval for a change of control. When an acquirer doesn’t have regulatory approval to immediately write the business in its own legal entities, the transaction structure typically allows an acquirer to:
      • Continue to issue and renew policies using the vendor’s legal entities for a defined period of time, and
      • Assume the economics of the business via reinsurance. The acquirer frequently is responsible for administering the business (which is still the legal and regulatory responsibility of the vendor’s legal entities) via a servicing agreement.
    • Stock transactions – These are used when assets and liabilities can be segregated into legal entities (e.g. using the European Economic Area’s (EEA) insurance business transfer mechanisms), or when a legal entity, such as a specialist underwriting agency, specifically supports the business being sold.
      • Transfer of assets and contracts/TSAs – Just as the insurance business being sold may be diffused across the vendor’s legal entities, the same may also apply to the people, facilities, technology and contracts with sellers that support the business. While a certain portion of these will clearly align either to SpinCo (and will transfer at close) or RemainCo, there will be a significant subset (particularly in IT and corporate services) that support both and are not easily divisible. For such functions where SpinCo is heavily reliant on the resources of its former parent and it is not possible for the acquirer to fully replace such services prior to the transaction closing, a TSA provides the acquirer and SpinCo with continuing access to and support from RemainCo’s resources after close.

Negotiating the TSA

TSAs provide access to the resources and infrastructure of the former parent for a defined period. While in certain simpler transactions, TSAs can be for as little as three months and require only that the support provided previously be maintained at the same service levels and at the same cost basis, it is more common that acquirer and vendor during the months prior to close:

  • Understand and define the reliance of the business being sold on its parent (and vice versa);
  • Set the duration post-close for each service required under the TSA;
  • Agree on the charging basis e.g. fixed monthly fee, usage, hourly rates (for tax efficiency, each service is usually priced individually);
  • Establish service levels and post-close governance processes.

The acquirer should set realistic timeframes for exiting from individual services. The complexity of insurance policy administration systems, the frequent integration of certain capabilities (such as billing, commissions, and contact centers) across products and the need to separate networks, migrate data centers and implement replacement mainframes frequently require TSAs of 24 to 36 months.

TSAs also may cover centrally provided non-IT services, including HR/payroll/benefits administration, facilities management, procurement, compliance or financial and management and regulatory reporting. However, the duration of these TSAs tend to be shorter – usually a few months, or sufficient to support regulatory and financial reporting for the period following close.

Ideally, the acquirer should seek as much flexibility as possible with the duration of the TSA. It should have the right to terminate the TSA early, the option to extend it at pre-agreed rates and the inclusion of force majeure clauses (a natural catastrophe can significantly affect exiting from a TSA).

Contract assignment and access to shared reinsurance

An area of often-underestimated complexity in carve-outs is the need to ensure that the separated business can continue to receive the benefit of third-party contracts with suppliers, distributors and reinsurers. In most jurisdictions, contracts cannot simply be novated (the insurance business transfer mechanisms of the EEA provide certain exceptions), but instead each contract must be evaluated to determine if assignment simply requires notification to the counterparty or its express consent.

The challenges that arise in contract transfer are both:

  • Logistical – 85% of counterparties contacted typically respond at first instance. However, a recent carve-out had more than 50,000 contracts that needed to be assessed, prioritized and migrated. In this instance, chasing down the remaining 15% was a real challenge.
  • Commercial – Certain experienced counterparties, knowing the tight timeframe for most transactions, may try to renegotiate better terms either prior to the contract being assigned to the acquirer, or prior to permitting the vendor to use the contract to provide services under the TSA.

Also important in a carve-out is a clear apportionment of access to historic reinsurance programs shared between the vendor’s continuing business and the business being sold, as well as definition of the resolution process for any post-close disputes.

Executing close

Transaction close for virtually all insurance carve-outs is triggered by the receipt of one or more regulatory consents enabling the execution of fronting, reinsurance and stock transfer agreements.

When migrating staff and assets supporting SpinCo to the acquirer, supporting staff and assets are moved into a legal entity, the ownership of which transfers at close in certain cases. However, when the relevant staff are not employed or supporting assets are not owned by legal entities transferring to the acquirer at close, there will need to be arrangements for the valuation and transfer of both tangible and intangible assets (e.g. trademarks) and the offering of employment and enrollment in benefits to selected staff by the acquirer. This is a significant logistical exercise for an HR function.

See also: Group Insurance: On the Path to Maturity  

Insurance carve-outs are also particularly challenging for finance functions:

  • The combination of renewal, reinsurance and legal entity acquisition in the transaction structure complicates accounting immediately post-close.
  • Cross-border acquisitions can include acquirers and sellers with different accounting standards (e.g. IFRS, U.S. GAAP, statutory and JGAAP) that often have very different rules on the treatment of assets and liabilities.
  • The practice of closing at a month or quarter end – which in some ways can simplify the transition – may also introduce a tight and immovable timeframe for external financial and regulatory reporting.

Lastly, although there typically will be several months between the deal being agreed upon and the close, this may not be sufficient time – particularly in larger acquisitions across multiple locations – to roll out the acquirer’s networks and desktop technology prior to close. Therefore, full access to the acquirer’s IT capabilities may need to wait until later in the integration.

Post carve-out integration

While an acquisition of an entire enterprise provides a pre-existing governance structure, an insurance carve-out typically includes fewer members of senior management and requires rapid integration of functional management within the acquirer’s existing structure, the expansion of governance and compliance structures to include the acquired operations and the establishment and communication of delegations of authority and decision-making rights.

Due diligence should have provided the acquirer with initial hypotheses as to the organizational capabilities required by the combined organization, interim and end-state operating models, and opportunities for synergies.

As with any insurance acquisition, synergies in carve outs are typically realized through:

  • Functional consolidation.
  • Platform consolidation and process standardization, which enhances productivity and enables staffing efficiencies.
  • Facilities and infrastructure reduction, and
  • Reduced costs through more efficient third-party vendor selection.

PwC’s research indicates that the most successful acquisitions are those that develop momentum by demonstrating tangible integration benefits in the first 100 days. Accordingly, the acquirer should act fast but should also be prepared to revisit pre-deal assumptions and revise its integration roadmap as the two organizations integrate and new information becomes available.

Conclusion

Based on what we see in the market, notably a recent succession of P&C and reinsurance megadeals, we predict that insurance industry consolidation will continue apace. Multi-line insurers have divested themselves of numerous franchises and this trend seems likely to continue. Because these types of transactions are complex and depend on many internal and external factors, companies that are considering such moves will need to be aware of and address the many challenges and issues we describe above.

This article was written by John Marra, Mark Shepherd, Michael Mariani, and Tucker Matheson.

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.