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.

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• 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).