The interest from private equity in the insurance industry seems insatiable and PE has continued to be a serious driving force behind M&A for a number of years. In 2021, total insurance M&A deal volume in Europe increased by 40 percent from the previous year, with private equity portfolio companies acting as acquirers in more than 50 percent of these deals.
PE entered the insurance market through acquisitions of intermediaries and brokers, which provide attractive income streams with less risk and much less capital requirements than carriers. The PE sector then invested in P&C exposure, Lloyd’s vehicles, and making run-off carriers more efficient before turning to life insurance in run-off, with its large, well-stocked asset pools and permanent capital to manage. This trend continues today: Viridium – backed by Cinven and Hannover Re – announced in June that it was acquiring the life insurance back book of Zurich Insurance Group, including the transfer of $20 billion of net reserves.
Firepower is just part of the story
Notwithstanding the frenetic pace of deal-making in recent years, private capital is estimated to have a combined $3.2 trillion of dry powder at the close of Q2 2022, although this is a decline compared to the high watermark of 2020. This sort of firepower, ready to be deployed on M&A, is noteworthy, but it’s the specific attractions of the insurance industry that are enticing to PE.
On a broad macroeconomic scale, an insurance business is a form of non-correlated asset, which given the current uncertainty in the global economic climate, can be of considerable benefit. There is the opportunity to manage the large pools of permanent capital held by insurance companies resulting in a guaranteed amount of assets under management and the associated fees and income for the asset management arm of PE firms. On the underwriting side, the hardening rates in the industry resulting from covid-19 and other market dynamics provide attractive opportunities. The insurance companies benefit too from partnering with PE and gaining their expertise in more sophisticated investment strategies – such as minority and club investments, provision of debt and quasi-debt, investing in preferred equity (all within the scope of Solvency II) – particularly in the climate of low returns and low interest rates as seen over the last few decades.
PE has shown considerable interest of late in managing general agents in specialty areas and in the insurtech space. Managing general agents are generally seen as attractive targets as they are expected to have better margin accretion and a deeper reach into the insurance ecosystem than other areas of the market, as well as the attractive income streams characteristic of intermediaries. On the other hand, insurtech companies typically, in their early stages, look for external fundraising to fund their growth rather than pursuing a sale.
As a result of PE’s increasing presence in the industry and particularly the run-off sector, a number of regulators are reassessing PE as controllers of insurance companies. In our view, the biggest risk to the goodwill built up by PE’s good custodianship of various insurance companies over past years is that one catastrophic transaction will likely result in strongly adverse reactions from regulators who remain sensitive to PE owners (looking no further than Greg Lindberg and Global Bankers). The “first class” of PE owners have spent considerable time building up the skill set and experience of owning and operating these assets. In doing so, they have become “known” to the regulators. While new PE entrants to the market may want to replicate or continue the success of these earlier entrants, many are generally alive to the risks of jumping into complex regulatory structures without the commercial experience and historic skill set to reassure regulators and are researching carefully and/or considering co-investment to start with.
So, is PE interest in insurance sustainable? Maybe as interest rates rise, there may be less incentive for insurance firms, particularly life companies with guarantees, to sell blocks of business as it’s easier for them to meet their liabilities.
However, the same inflation and rising interest rates also tend to affect the risk of investments, increase the cost of debt, and inflate claims, particularly in liability businesses, so companies will be increasingly trying to reduce volatility by reinsuring and/or running-off their legacy business. There is also a continuing strong desire in the market to offload business with high capital requirements and/or that is non-core (enabling the insurer to invest further in its core business by unlocking and redeploying the capital) and thereby creating opportunities for PE. There are some segments of the market that remain fragmented, thereby resulting in opportunities for consolidation and scaling. We are still seeing determined interest from PE as acquirers – Cinven has recently completed fundraising for a €1.5 billion financial services focused fund – and as owners – some PE owners of insurance companies are nearing the end of their investment period and are considering their exit options, such as internal restructurings, M&A, listings or a sale to other financial investors. The current dislocation and volatility of markets with rising inflation and interest rates edging up tends to favour financial buyers who can offer solutions to the industry.
We therefore expect PE to continue to be a driver of M&A in the insurance industry for years to come.
Clare Swirski is an international consultant in Debevoise & Plimpton’s London office, Ben Lyon is an international counsel and Katie Power is a corporate associate and a member of the firm’s insurance and financial institutions groups.