20 April 2018, 14:06 GMT
Expectations of higher rates facilitate the sale of US legacy blocks
In the US, Hartford and Voya are selling legacy blocks of insurance business, mostly containing variable annuity liabilities, to Private Equity (PE) backed vehicles. These blocks predate the financial crisis, nearly brought down the companies in 2008/09 and have been closed to new business ever since. A disposal was always the plan, but for years the bid-offer remained too wide as interest rates collapsed. The fact that they are now able to transact suggests that PE firms see a higher future path of interest rates than what the forward curves currently imply. But the ultimate test will be Long Term Care (LTC), the longest-tail, most interest rate sensitive and problematic corner of US life insurance. An LTC transaction might provide definitive evidence that the interest rate environment has changed.
Global Insurance M&A deals in the last 10 years
Insurance risk and asset management bifurcate in the UK
Legacy insurance liabilities are not in short supply in Europe either. The closed block market developed early in the UK, with the emergence of specialists such as Phoenix, Swiss RE and Rothesay. The size and frequency of transactions has increased recently, with Prudential selling £12bn of UK legacy liabilities to Rothesay, and Phoenix buying the insurance business of Standard Life Aberdeen (SLA). The latter highlights another trend: the bifurcation of the industry between insurance risk and asset management - SLA only wants the latter. The UK businesses of Old Mutual and Prudential, about to be spun off, may chart similar trajectories.
Closed block consolidation moves to Germany
The Phoenix-SLA deal also gives Phoenix a foothold in the German market, where it sees a £160bn opportunity in coming years. CEO Clive Bannister frames this as an option but the very fact that he does not see SLA Germany as a distraction speaks volumes to the evolution of that market. For years industry pioneers have been looking at Germany but it only now seems ready for a quantum leap in closed block transactions, with the large Ergo and Generali Leben up for sale. Despite three small deals already completed, convincing Bafin that foreign capital (PE or specialist) is a good steward of policyholder liabilities has not been easy. Interest rate pressures, technological innovation and shifts in distribution structures have finally cracked it.
Buyers are getting bolder
The decision by AXA to buy Non-life/Reinsurance specialist XL raised the bar. While Axa rationalises it as accelerating its shift from financial market risk (it is IPO-ing the US Life business in view of a full exit) towards Non-life, the deal looks more aggressive in size, funding and fit. An example of market exuberance? Time will tell - there are certainly scenarios where it can work very well for Axa.
China bid disappears
Not all global trends favour M&A. The Chinese bid for instance, has all but disappeared. The China Oceanwide-Genworth deal announced in 2016 has been persistently delayed by CIFIUS on the grounds of data protection concerns. While still pencilled in to go ahead, it is hard to think of a deal less in tune with the political mood in the respective home countries of the insurers involved.
Likewise, a sharp stock market correction could kill many deals struck on inflated multiples or reliant on benign funding conditions. But for the time being, for insurance CEOs with something to sell, the phone is ringing.
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