M&A activity in the insurance sector held up reasonably well
in 2023. This is despite the sector being impacted by many of the
trends outlined in our global M&A outlook for 2024, with issues
such as ESG, geopolitics and changes in M&A processes all
playing a part.
We have, however, picked two trends that feature high on the
agenda of most insurance M&A teams: private capital and the
digital transition.
Private capital
In common with many other sectors, the insurance sector has
attracted significant investment from private capital in recent
times. This is most pronounced in the US, where The Economist
recently reported that life and annuity insurers backed by private
equity are estimated to own assets worth nearly US$800 billion,
from an almost standing start a decade or so ago.
Other jurisdictions have clearly noticed this and have made what
appear to be overtures to those investors with a view to attracting
new capital into their economies. Politicians in several countries
are taking steps to give insurers more investment flexibility,
which will allow them to generate better returns. This both makes
those insurers more attractive for investors and encourages those
insurers (especially life insurers) to invest in illiquid assets
that will benefit the wider economy (infrastructure investments are
most often given as the example). This, in some ways at least,
follows the approach seen in the US, where the assets on
insurers’ balance sheets, and insurers owned by private equity
in particular, have changed considerably over the last decade.
If there are better returns for investors and there is a boost
for the wider economy, everybody wins and so everyone is happy,
right? Well, not quite.
Regulators have for some time expressed concerns about perceived
risks with private equity ownership. Specifically, they are
concerned about the possibility of more aggressive investment
strategies and the greater risks that might come with that. These
concerns are more pronounced in the context of insurance carriers
than insurance brokers, for the simple reason that policyholders
tend to have a greater financial reliance on the former than the
latter.
While those concerns have been aired for a few years, 2024 may
be the year when the tension between those regulatory concerns and
the political impetus to attract new capital for investment comes
to the fore. In the UK and Europe, laws that increase investment
flexibility are expected to come into force. At the same time, the
year saw a dramatic example of the real-world impact of the
regulatory concerns, with BaFin, the German regulator, rejecting a
deal that would have seen Zurich sell a €20 billion
life-assurance portfolio to Viridium, which is majority owned by a
major PE firm. The commentary on BaFin’s decision, including
from the parties involved in the deal, left little doubt that
BaFin’s concerns stemmed from Viridium’s ownership.
That rejection may prove to be a one-off, given the PE firm in
question had a significant disagreement with the Italian regulator
in the context of Eurovita (an Italian insurer owned by the same PE
firm) going into special administration. It does not seem too big a
leap to imagine that the German regulator’s decision was
mainly, if not solely, influenced by the experience and views of
the Italian regulator. That said, EIOPA (the EU’s
‘regulator of regulators’ for insurers) issued a supervisory statement in 2022 that included
concerns about private-equity ownership, and so some level of
regulatory scepticism has been present in the EU for a few years
now.
This scepticism goes beyond regulators, with the IMF having expressed similar concerns as recently as
December 2023. That report shows that the relevant investments to
date have been concentrated in the US. Of the PE-influenced life
insurers the IMF identified, about 60% are in the US. Even so, the
IMF’s paper encourages regulators globally to consider the
trend and several related policy points.
That context aside, countries that are serious about attracting
significant amounts of new capital into insurance (and financial
services more generally) will need to find a way to work with
private capital. Private-capital investors, on the other hand, will
need to go into deals with their eyes open, and realise that what
works with one country’s regulator will not necessarily
translate to the next country. It will be important to be clear at
an early stage on where the boundaries are; regulators are not
afraid to ask difficult questions and will be hard to win over if
the answers give the wrong first impression.
It is worth noting that in some major markets significant
investments in the insurance sector have been focused on
international strategic investment recently, despite strong private
capital investment in other aspects of financial services. In
Australia, for example, most significant life insurance investments
in the last few years have been for more traditional reasons, like
diversifying exposure to longevity risk, strengthening market
position and increasing distribution capabilities. However, as
private capital interest in the financial services sector continues
to gain pace, we expect that trend to become increasingly relevant
for the insurance sector in these markets (as it already is for
investments in other kinds of financial services). In Australia,
one development to watch is whether upcoming reforms to better
enable banks, insurers and superannuation trustees to provide
personal financial advice to customers will reshape the way
insurance products are distributed and make these assets more
attractive to private capital investors.
The investment of private capital in the sector, and the related
regulatory points, does not manifest through M&A activity
alone. Some reinsurance transactions, and life reinsurance
transactions in particular, are also relevant. The PRA in the UK,
for example, has issued a consultation paper on precisely this
topic, with the concern being directed towards reinsurance
transactions where large amounts of assets are transferred outside
of the jurisdiction to be managed by an “offshore”
reinsurer. Where a regulator potentially loses the ability to issue
directions in respect of those assets, it starts paying closer
attention. Precisely how close that attention becomes depends on a
range of factors, like where the assets are held, what security is
in place, the legal risks that might arise, the make-up of the
reinsurer’s balance sheet and the nature of the risk
reinsured.
The digital transition
While it has not happened at the same pace as in the banking
sector, it has always seemed inevitable that the digital transition
will impact the insurance sector in a major way. The question has
always been “when” rather than “if”. With
artificial intelligence now a realistic possibility in the short
term, insurers everywhere will be considering how that might affect
the market and refreshing their strategy accordingly.
While tech companies opening insurers cannot be ruled out,
Amazon’s decision to discontinue its insurance offering shows
that having capital and data are not a guaranteed way to break into
the insurance sector. Insurers, on the other hand, are unlikely to
develop breakthrough technology themselves. As such, collaboration
between insurers and tech companies seems the most likely
course.
The digital transition is primarily about efficiency. Realising
that efficiency in the insurance sector is, however, proving more
difficult than many predicted. According to McKinsey’s Global
Insurance Report for 2023, life insurers’ costs as a share of
revenue have increased by 23% since 2003. Other financial services
companies, such as asset management (and indeed general insurers),
have fared much better in this respect over that period. As a
result, it seems likely that there will be a clear case for tech
investments by insurers, in which case the question would be what
investments make the most sense.
In the past, the answer to that question was usually to identify
a target and acquire it outright. That can, however, represent a
very big and very risky bet, particularly given how quickly
technology is developing and changing. It is in this context that
venture capital (VC) tends to come up as one potential answer
(alongside others, like strategic commercial partnerships).
Interest in this approach has ebbed and flowed. Since its peak
in 2021, VC investment in insurtech has declined in all growth
stages, particularly with later-stage funding. Insurtech has
largely reached a stage of maturity with lower expectations of
investment growth and valuations, although the advent of AI (and
the hype connected with that) could change the equation again. Even
in the relatively mature parts of the insurtech market, however,
previous investments are still reaping the benefits of previous
growth, with a compound annual growth rate of 34% between 2018 and
2022.
Most recently, VC investment in insurtech had a mixed
experience, reaching only US$4.1 billion in 2023 (the lowest since
2017). This slowdown was a result of compressed valuations, a
slower VC environment and a reduced number of successful exits. The
latter part of 2023 showed signs of improvement. US$1.7 billion was
raised across 115 deals in Q3, marking a 53% growth in deal value
compared to the equivalent in 2022. This was the highest amount in
the last four quarters, albeit flat in terms of deal count.
Both those increases and the interest in AI mean that there is
cause for optimism for 2024, although the types of deals will only
become clear once insurers finalise their strategies and identify
credible targets that fit.
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