Tag Archives: m&a

How to Address Environmental Risk

Mergers and acquisitions (M&A) insurance solutions are effective tools to facilitate the closing of mergers and acquisitions and finance transactions when parties require additional comfort on a variety of issues. Proven strategies to achieve certainty of closing, these solutions are used by buyers and sellers to bolster both the decision-making process and approach to risk allocation at times when traditional legal opinions/expert advice, indemnity, escrow or sales price reductions do not provide adequate financial comfort or could impair the economics of the deal. Representations and warranties insurance, specifically, has emerged as a common tool in the current M&A market – serving as a means for sellers to effectuate a clean exit and for buyers to ensure they have a viable source of recovery if the business ultimately is not what it was represented to be.

Typical R&W coverage generally extends to most, if not all, of the representations and warranties provided by the seller or target company in the purchase agreement, including fundamental representations such as title and authority as well as the full suite of business representations, including financial statements, tax, intellectual property and undisclosed liabilities. Of course, the scope of coverage varies deal to deal depending on the operations of the target company and industry risk profile, as well as the depth of the buyer’s due diligence process. Carve-outs to coverage are often limited and, when proposed by the insurer, are narrowly tailored to the specific known issue causing concern.

One area that can be challenging to insure is environmental risk. Insurers’ ability to cover an environmental representation within the R&W policy is case-specific and depends on not only the environmental footprint of the target but also what issues are uncovered during diligence. Deals involving target companies with a relatively light environmental footprint or a positive claims history are often successful in achieving coverage of environmental representations – those that fall outside this category may confront exclusions for specific environmental conditions or, in the most severe case, an exclusion of the environmental matters representation itself. Subject to underwriting, coverage for “paper” environmental risk such as licenses and permits can often be preserved. In any circumstance, however, R&W policies are not designed to provide coverage for known contamination, active remediation or toxic tort allegations.

For dealmakers grappling with limitations to coverage of environmental matters in the R&W policy, all is not lost — acquisitions of target companies without a clean bill of environmental health or involved in a risky class of business are not left without options. Stand-alone environmental insurance can be an effective complement to an R&W policy to help plug the gap in coverage around the environmental representations.

Depending on the nature of the transaction and the complexity of the target company’s site(s) and operations, a properly designed environmental site liability policy, which is also known as pollution legal liability, can complete the R&W placement. This can be accomplished by providing essential first- and third-party coverages including defense costs addressing known and unknown environmental conditions, with certain restrictions, with or without an environmental representation contained in the underlying purchase agreement. As a complement to the R&W policy, a customized environmental policy may also be able to replace or supplement an escrow or indemnity, becoming a value-accretive tool for future deals involving the insured site/operation by the careful addition of policy assignment provisions. R&W policies similarly afford assignment of rights to a future purchaser of the stock or substantially all of the assets of the target company, providing an attractive value-add for future divestment.

See also: The Environment for M&A in Insurance

Environmental site liability policies do not rely on establishing a breach of a representation and its subsequent damages. They are designed with a relatively low retention, as compared with an R&W policy, and are responsive to changing environmental regulations that can give rise to a loss. Written on a “claims made” basis for policy terms up to 10 years, environmental site liability policies can provide first-party clean-up and third-party protection for clean-up, bodily injury or property damage claims for known and unknown environmental conditions. This product has the broadest application of any single environmental product line due to its flexibility of wording and risk specific underwriting. From an operational standpoint, the environmental policy can be structured to either cover an entire corporation’s operations or a single site. Extensions of coverage for ancillary current or historic operations can also be covered including divested locations, waste disposal, transportation and business interruption. Coverage offered may be tailored to all historic operations pre-closing and extended to continuing operations for the target company post-closing.

Additionally, the environmental site liability policy provisions are flexible enough to be used in lieu of an indemnity or to support indemnity requirements of a purchase and sale agreement by responding to an indemnified party for payment under the terms of the purchase and sale agreement if the indemnitor fails, or is unable, to honor its indemnity. This coverage extension is known as an “excess of indemnity” and is carefully underwritten with counsel and a comprehensive review of the purchase agreement. The placement of comprehensive environmental insurance may also help avoid carve-backs to coverage under the R&W policy by providing insurers comfort that the R&W policy is not the first line of recourse on environmental issues. In those instances, the R&W policy specifically sits excess of the underlying environmental policy, responding only after such policy limits are exhausted (or loss incurred equivalent to the underlying limits if the environmental insurer is unable to satisfy the claim). Careful drafting of the “Other Insurance” provision in the R&W policy is needed to ensure the smooth function of such a structure.

Consider a buyer looking to acquire a nine-facility target engaged in wood treatment operations since the 1960s. Two facilities are currently the subject of an indemnity included in a 1980s purchase agreement with remediation continuing at those locations. The buyer has negotiated for the indemnity obligation to continue through the current transaction, but there are seven sites without any such indemnity. Although the R&W underwriter recognizes the environmental representation and associated indemnity with respect to two of the sites, the absence of protection on the remaining sites and long history of operations creates concern and thus the need for environmental issues to be insured separately. The environmental broker designs a tailored solution including two policies to provide a comprehensive risk management solution:

Policy 1: Properties that are the subject of the indemnity receive a policy dedicated to the scope of coverage under the indemnity; the coverage matches the indemnity obligations and applies on an excess basis; the policy is triggered by failure of the indemnitor to perform on their obligation, in excess of the policy self-insured retention (SIR).

Policy 2: Provides coverage for new conditions and unknown pre-existing pollution conditions at all nine locations; known conditions at sites without the indemnity are excluded for remediation costs

Both policies carry a 10-year policy term, with exception of the new conditions coverage policy that is limited to three years. Policy 1 responds if the indemnifying party is unable to perform.

The seller was able to limit the scope of the indemnity solely to known and quantified clean-up obligations. Any additional indemnity for unknown conditions or tort liability associated with known or unknown issues was not required because the insurance program provides that coverage. Both Policy 1 and 2 also contained assignment provisions that are beneficial in the event of a future sale.

In another instance, a transaction stalls when the R&W underwriter declines to insure the environmental representations of a large global equipment manufacturer because due diligence demonstrates that the target locations likely have significant environmental impacts due to long-time solvent use. The environmental insurance broker is called in to design a solution:

Policy 1: Provides coverage for all pre-existing conditions, known and unknown, where the most challenging locations assume a higher self- insured retention and the policy restricts coverage for remediation by applying a capital improvement and voluntary site investigation exclusion coupled with a third-party trigger for any remediation claims. A 10-year term applies, and the other insurance provisions are modified to primary coverage; most importantly, the policy does not specifically exclude any constituents.

Policy 2: Is written on a three-year term and provides coverage for new conditions from date of sale forward for the continuing operations. Coverage is restricted in a similar matter to Policy 1.

The environmental program structure described above was quite beneficial to the seller because it did not contain any constituent exclusion. This solution also allowed the R&W underwriter to provide coverage for the seller’s environmental representations on an excess basis.

As these examples suggest, the current environmental marketplace is competitive, resulting in favorable coverage terms, conditions and premium for many transactional risks. Limits of up to $50 million are potentially available from a single carrier, and total limits of $500 million are potentially available for layered programs involving multiple carriers. Significant capacity is similarly potentially available for R&W insurance with limits available of up to $50 million-plus from any one carrier and close to $1 billion on an aggregate basis per deal. The significant increase in demand and use of R&W policies over the past few years has also translated into a very competitive marketplace, resulting in decreased pricing and broadening coverage and appetite for challenging deals.

See also: Developing A Safe Work Environment Through Safety Committees  

The strategic use of R&W insurance coupled with an environmental policy can be indispensable in helping buyers and sellers move a transaction forward to a smooth and successful close. Dealmakers and their advisers should carefully consider the environmental risks posed by the operations of the target company early in the deal to determine how such risks will be apportioned between the parties and if insurance, whether a R&W policy, environmental policy or both, provides an opportunity to secure protection against such risks while maximizing the economics of the transaction.

All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.

U.S. Insurance Deals: Insights on 2H 2017

Executive Summary

The U.S. insurance sector announced deal value reached $9 billion in the second half of 2017, down from $24.2 billion in the second half of 2016.

Activity remains robust in the brokerage sector, with 232 announced deals, which was 3% higher than in the same period in 2016.

Among insurers, megadeals have been limited by uncertainty in terms of the direction of tax and regulatory reforms. Nevertheless, the passing of tax reform at the end of 2017 and postponement of the implementation of the Department of Labor’s fiduciary rule until 2019 will likely improve clarity for deal making in 2018.

Insurers are expected to continue to divest capital-intensive or underperforming businesses. Private equity will no doubt continue to pursue U.S. insurance sector assets, which are now more attractive due to a lower corporate tax rate.

Trends and highlights

  • 271 insurance deals were announced for a disclosed $9 billion deal value in 2H 2017 (of which 248 deals had undisclosed deal values)
  • Insurance broker deals remained the most active, composing 86% of deal volume
  • For insurance underwriter deals, the life and property/casualty sectors each contributed more than $4 billion in disclosed deal value while property/casualty led in deal volume

Highlights of 2017 deal activity

Robust deal activity in 2H 2017

There were four announced deals valued in excess of $1 billion, for a total of $6.1 billion, in the second half of 2017.

See also: U.S. Insurance Deals: Insights on First Half  

Key transactions and themes

The Hartford agreed to two major deals in the last quarter of 2017, including an acquisition and divestiture:

  • Hartford Financial Services Group unit Hartford Life and Accident Insurance agreed to acquire Aetna’s U.S. group life and disability business for $1.45 billion.
  • An investor group, including Pine Brook Partners, TRB Advisors, Atlas Merchant Capital, Cornell Capital, Basel, J. Safra Sarasin Holding and Hamilton, Global Atlantic Financial Group and Hopmeadow Holdings GP, agreed to acquire Talcott Resolution, a run-off life and annuity business, from Hartford Financial Services Group for $1.6 billion.

Private equity consortiums are exhibiting interest in runoff variable annuity platforms as insurers focus on new risks:

  • In December, an investor group, including Apollo Global Management, Reverence Capital Partners Crestview Advisors and Athene Holding, agreed to acquire the closed block variable annuity and fixed annuities businesses from Voya Financial for $1.1 billion.

The other notable deal announced in 2H 2017 of more than $1 billion in deal value was:

  • Assurant’s November agreement to acquire Warranty Group from TPG Capital Management for $1.9 billion. Warranty Group provides underwriting, claims administration and marketing expertise to manufacturers, distributors and retailers of consumer goods including automobiles, homes, consumer appliances, electronics and furniture, as well as specialty insurance products and services for financial institutions.

Top 10 US Insurance and Bermuda Deals Announced in 2017 (by value)

Source: S&P Global Market Intelligence

Sub-sector highlights and outlook

  • Life and Annuity — This sector has been suffering through the persistent low-interest-rate environment that has weighed on insurers’ investment portfolios. Nevertheless, the U.S. Federal Reserve raised the fed funds rate three times in 2017, and there are expectations of additional increases in 2018. Opportunities remain for insurers to exit capital-intensive or non-core businesses, with investor interest in closed blocks and narrow concentrations. In a recent deal, an Apollo-led investor group purchased the closed block variable annuity and fixed annuity businesses of Voya Financial for $1.1 billion. Also, The Hartford agreed to sell its runoff life and annuity business, Talcott Resolution, for $1.6 billion to an investor group.
  • Property/Casualty — Deal activity increased in the sector during the second half of 2017. In addition to traditional M&A, the P&C sector has seen mega insurance legacy transfer transactions, headlined by AIG’s $9.8 billion reinsurance, excluding interest, with National Indemnity to take on long-term risks from legacy commercial policies announced in January 2017.
  • Insurance Brokers — The segment continued to be the most active in terms of deal volume in 2H 2017. The most activity came from several serial acquirers buying regional brokers, further consolidating the market. The five most active acquirers were Acrisure, Hub International, National Senior Insurance, Alera Group and NFP.

See also: Insurance 2025: Smart Contracts  

Conclusion and outlook

Deals in the second half of 2017 ended on a strong note and activity should see further acceleration in 2018 as insurers continue to focus on cutting costs, achieving scale, and enhancing and streamlining or consolidating dated technologies.

  • Macroeconomic environment: The economic environment improved in the second half of 2017, although persistently 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 favors easing regulation, and the U.S. Department of Labor Fiduciary Rule enforcement has been delayed until July 2019, which may mitigate near-term implications for insurers that use exclusive agents.
  • Tax Reform: The passage of the Tax Cuts and Jobs Act is expected to be a mixed bag for insurers. Changes to the corporate tax rate, special insurance company provisions and the switch to a territorial system with anti-base erosion provisions significantly affect insurance companies (including reinsurers), both U.S.-based and companies based elsewhere that do business in the U.S. For some companies, life insurance products and taxation of international transactions changes are costly and outweigh the benefit of reduced tax rates. For other companies (e.g., issuers of short-tail products), changes in the computation of taxable income are more modest. In addition, companies that were chronically subject to AMT under current law may now look forward to an eventual refund of minimum tax credits. The companies that stand to gain the most from reduced tax rates would be U.S.-based multinational companies. See Tax reform insurance alert and Tax reform impact on private equity for additional discussion on the impacts from the Tax Cuts and Jobs Act.
  • Technology: Insurers have been slower than many other industries to adopt new technologies, but they are increasing investment in technology and innovative platforms. According to CB Insights and Willis Towers Watson, insurtech funding volume increased 38% year over year in 3Q 2017. In a headline-grabbing deal, Lemonade raised a $120 million Series C funding round led by SoftBank.
  • Canada interest: Closer to home, there is evidence of an increasing appetite from Canadian buyers. In the second half of 2017, there were three announced deals in which the acquiring company was Canada-based. The largest deal was Quebec-based Industrial Alliance Insurance agreeing to acquire Columbus, Ohio-based Dealers Assurance and Albuquerque, N.M.-based Southwest Reinsurance for $135 million. Also, Toronto-based Intact Financial completed its acquisition of Bermuda-based OneBeacon Insurance Group from Hanover, NH-based White Mountains Insurance Group for $1.7 billion.
  • Public offerings: Several major global insurers have responded to the low-growth environment in the U.S. with significant divestitures or restructuring. MetLife successfully completed the spinoff its U.S. retail business, Brighthouse Financial, in August. AXA also filed preliminary documents for an IPO of its U.S. operations this past November. It seems likely that other large insurance companies will have similar divestiture or restructuring plans.
  • Asian inbound interest: The past several years have seen Asian firms expand their global 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. China Oceanwide’s acquisition of Genworth has yet to close and is still under CFIUS review.

You can find the full report here.

Life/Annuity M&A Is Heating Up

As life insurance and annuity carriers pursue greater market share and growth, a potential solution sits before them: M&A activity. This transactional path, leading to deep consolidation in the life insurance and annuity (L&A) sector in the U.S., is stoking much debate and discussion in company boardrooms.

The hunt for elusive growth and profitability for carriers in the U.S. has many players, creating a crowded marketplace for possible consolidation. The multi-headed acquirers come in three dominant forms: large insurance companies, private equity (PE) investors and foreign acquirers, driven largely by the Chinese and Japanese.

Insurance carriers intimately know about their competition and what companies in the sector would mesh well within their operations. Executives have the greatest amount of specific industry expertise and therefore can understand the pros and cons in a specific combination.

See also: How Life Insurance Agents Can Be Ready

Private equity investors have been turning to the life insurance and annuity field for several years to provide consistent returns, as these companies have predictable cash flows. Through these investments, investors can strengthen their returns for assets under management with steady growth. One caveat to this investment approach is the concern of the increasing regulatory state and federal pressures, as navigating through 50 individual state regulatory guidelines can be burdensome and difficult if a company moves out of a state and into a new one.

Foreign countries like China and Japan continue exploring opportunities to increase their presence in the U.S., the world’s largest insurance market. Reasons abound: Japanese insurance companies have found U.S. acquisition targets appealing to offset the aging of Japan’s population and to provide a more attractive interest rate environment. Chinese companies have been snapping up foreign companies, including in the U.S., searching for yield on their capital and economic growth.

Several reasons exist for this trend of M&A activity.

  1. Buyers are motivated by the current low-interest-rate environment and the opportunity to expand their assets and book of business. This has always been an essential piece of the M&A discussion as market conditions must be favorable to make any transaction worth its while.
  2. Sellers are suffering from the low return on their capital. By exiting less profitable lines of business, they can reallocate their capital for use in other capacities. As contemplation of one’s business clarifies, many carriers may conclude that selling, rather than buying, assets is the chosen path. Selling could stabilize or enhance a company’s bottom line as the capital obtained in a sale can be reinvested in its existing operations or be put to use for another potential acquisition.
  3. Increasing regulations are restricting the ability of companies to productively run their businesses; thus, they are looking for exits. Companies are often stymied by the sheer weight of complying with and managing regulations. Exiting businesses can become appealing.

Regardless of which direction is undertaken, one aspect paramount to success is the importance of ensuring that business continues to operate smoothly. In today’s environment, the role of technology, specifically at a time when companies are implementing and managing digital transformations, can be a beacon of light. And as acquirers delve deeper into possible transactions, increasingly they are employing an outsourcing model to extract more value.

See also: This Is Not Your Father’s Life Insurance  

Safeguarding a company’s operations and maintaining its continuity through powerful technology and servicing solutions, or what we call “future proofing,” has additional benefits besides the desired functionality. Companies must first build their vision and plans and then bolster them with end-to-end operational services. This step will then enable rapid expansion into new market segments, faster product launches and seamless servicing of open and closed blocks of business. By future-proofing through technology, carriers can drive greater efficiencies, lower costs and produce higher levels of customer satisfaction.

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).