UK: Corporate Insurance M&A - A Global Overview 2009-11

Executive Summary

Welcome to our first report on mergers and acquisitions (M&A) activity in the global insurance underwriting market. Based on data supplied for completed transactions between January 2009 and June 2011 by Thomson Reuters, our corporate insurance specialists around the world have put together a review of key trends and activity in their regions.

Overall, as with other sectors in the financial services industry, strategic M&A activity within insurance went into decline in the immediate aftermath of the financial crisis. With economies in recession and balance sheets depleted, management were keen to avoid any activity – particularly M&A – that might threaten or create uncertainty over capital positions. Even when good opportunities were identified, many fell at the first hurdle either due to a lack of available funding or a mismatch in pricing expectations between buyers and sellers.

However, after a declining trend through 2009 and 2010 (see chart below), this year has seen activity pick up sharply, albeit with some regional variations.

Overall, Europe accounted for 44% of the deals in the period, and had the highest volume of insurance M&A in 2009 and 2010. However, the number of deals conducted in the region has seen a sharp year-on-year decrease; down by 21% in 2010 and by 14% in the first half of 2011 compared to the same period the previous year. This has meant that Europe's dominant share of the global insurance M&A market fell from 51% in 2009 to 30% in 2011.

In terms of the volume of M&A activity taking place in Asia Pacific, levels of activity were steady in 2009 and 2010 with 69 and 66 deals respectively. As a consequence, the region accounted for around 12% of global insurance M&A activity over these two years. The first half of 2011, however, saw this number rise dramatically with more deals than the whole of 2010, representing over 23% of global M&A volume for this period.

From 2009 to 2011 the Americas accounted for a significant proportion of global M&A activity in the insurance sector, with steady year-on-year growth as a proportion of all deals made around the world. The region's share of global M&A only increased 5% – to 43% – in 2011 as the total number of deals done globally rose sharply, although this was sufficient for the region to overtake Europe as having the largest share of all deals done.

So, what has changed? Certainly, rising financial asset values have given boards greater confidence and balance sheet flexibility. There has also been more readily available finance, including leveraged deals, which are attracting private equity firms. The final element is that buyers and sellers are more closely aligned on what the price should be.

Global trends

While the credit crunch largely inhibited M&A activity, one key driver has been deals actually driven by the fallout from it, particularly disposals of assets by re/insurers looking to repay government bail-outs, shore up their balance sheets, or forced sales by regulators. The most prominent among these has been the sale by AIG of its life insurance businesses, particularly American Life Insurance Company and AIA Group Limited. This is an on-going trend, as demonstrated by the predicted sale by Royal Bank of Scotland of its insurance subsidiaries in the UK; DirectLine and Churchill.

There is also strong evidence that – almost irrespective of the geography in which they are operating – there is a growing understanding that insurers need to build scale in order to strengthen their balance sheets and sustain their margins. Examples of this trend abound: the merger of Nipponkoa and Sompo in Japan in 2010 which was designed to consolidate market position in an industry beset by stagnant premiums; the acquisition of AXA APAC by AMP to help their move into developing markets in Asia; RSA's purchase of Al Ahlia Insurance in Oman to consolidate its market position in the Middle East; and Resolution's buyout of AXA Life as another step in the consolidation of the UK's life insurance market.

Businesses with effective management and underwriting teams, which are able to deliver consistently strong returns, are well positioned in this trend, as the view of many shareholders is that they would prefer better or more focused management teams to look after bigger businesses.

There is also a desire to create an optimum size – a trend that seems particularly prevalent in the reinsurance space as cedants look to minimise their counterparty credit risk. When the class of 2001 set up their reinsurance businesses in Bermuda, typical critical mass to be taken seriously appeared to be around $500 million; by 2005, this had doubled to $1 billion. By the time of the financial crisis, a serious market player was closer to $3 billion – and now the floor appears to be rising further as the top 10 reinsurers all have total shareholder funds of more than $5 billion. The desire to increase scale further will undoubtedly drive businesses to look at strategic deals. The current discussion around the possible merger of Allied World and Transatlantic Holdings appears to be a good example of this trend. If it happens, the new entity will have $8.5 billion in total capital to support future growth and enhance revenue opportunities.

In many of the emerging markets, there is also a consolidation trend as the markets reach new levels of maturity. Earlier stages of development tended to see numerous start-ups in the insurance sector – not all of which had the critical mass to survive going forward. In many markets, therefore, a wave of merger activity is predicted to create fewer, stronger businesses.

The final component is the imminent arrival of Solvency II in Europe and its equivalents elsewhere. This will mean an increased focus on capital requirements and a review by re/insurers of both their books of business – live and in run-off – and the capital they require. This will undoubtedly trigger a range of corporate activity from capital raising to sales and purchases. Buyers will hope to apply more effective capital management techniques to companies that may have been operating relatively inefficient structures, while sellers will be looking to reduce the capital required.

We believe that this trend for increased M&A activity is set to continue in the coming years as regulators and customers look for strength and stability in the risk transfer business. For a more in-depth local perspective, or a view on crossborder transactions, please don't hesitate to contact our regional partners listed at the back of this report.

The Americas

The M&A market in the Americas has shown a consistent level of activity over the last two years, with 2009 and 2010 seeing a similar number of deals – around 200 – in each year. However, this has taken a step up with the first half of 2011 witnessing 125. Within the region the USA is by far the most active country in the insurance M&A market with 410 deals over the entire period under consideration, which accounts for 75-80% of the activity in the Americas. The USA has also seen some of the world's largest deals in recent years, such as Metlife's buyout of the American Life Insurance Company for $15.5 billion in 2010.

Other countries in the region – such as Canada and Brazil – have seen some activity, albeit at much lower levels. Similarly there has been a small but steady stream of deals in Argentina, Chile, Peru and Mexico. Bermuda saw a sharp rise in deal activity in 2010, but has since dropped back in 2011.

The United States

M&A activity in the US accelerated in 2010 – especially in the second half of the year and, even without including the potential Transamerica Re transaction, the deal momentum appears to have carried forward through the first half of 2011. There are a number of main themes particular to the insurance sector that are driving corporate activity, including: the soft property/casualty insurance and reinsurance premium levels that have reigned for the last seven years; a challenging investment climate; the imbalance of both of over- and undercapitalized companies operating in the same insurance arenas; and related concerns as to the implementation of solvency standards.

As with other regions of the world, regulation is influencing US transaction activity in both a positive and a negative way. It is casting a shadow over all aspects of the US insurance industry and bringing with it a high degree of uncertainty. We expect that this will continue to influence transactions during 2011 and beyond. As a consequence, much of the expected deal activity will not only take the form of traditional M&A transactions, but will also take the shape of alternative structures such as closed block, loss portfolio, Part VII transfers and similar such deals.

The shadow of regulation

Each of the many facets of the US insurance markets; life, property, casualty, monoline (e.g., financial guaranty and title insurance), excess and surplus lines, is affected by the complex matrix of insurance regulation and oversight that overlays the industry. In addition, depending upon the individual characteristics of each particular company – the lines of business they write, their size, the geographical regions in which they are writing risks and their investment portfolios – they react very differently to the legislative environment. The sheer weight and complexity of US regulation is clearly illustrated by the laundry list of recent regulations impacting the insurance markets. For example:

  • The Dodd-Frank Act of 2010 through the establishment of a Federal Insurance Office within the Treasury Department and the Nonadmitted and Reinsurance Reform Act of 2010.
  • The granting of authority for the Treasury, Department and the US Trade Representative to enter into so-called 'covered agreements' that can pre-empt certain state laws.
  • Oversight by the Federal Reserve if the Financial Stability Oversight Counsel determines a company to be a systemically significant entity, and regulating the use of over-the-counter swaps (to the extent the insurer is deemed a 'major swap participant').
  • In addition, the National Association of Insurance Commissioners (NAIC)'s Solvency Modernization Initiative requires enhanced reporting and monitoring requirements, as well as covering capital and reserve requirements (including risked based capital), risk analysis and standards, and regulatory preventative and corrective actions and enforcement.

In recent years, there also have been numerous changes to state insurance laws and regulations – far too many to list here.

Solvency II also directly affects US insurers in that it requires them to increase capital standards for insurance exposures on a principal based basis. It also affects them indirectly in that companies in the EU and other relevant jurisdictions may have less capital available for reinsurance and other such transactions. Add to that new and additional issues raised by the rating agencies – particularly Standard & Poors, Moody's, Fitch and AM Best – and the resulting effect may be a cautioned drive towards a greater number of M&A transactions. The most recent investment valuation "reset" from S&P's downgrade of US treasuries has yet to completely filter through to the market and, notwithstanding public comments to the contrary, may very well drive valuations downward and transactions forward.

Market rationalisation

Overall, the trend has been for deals to rationalise market participants, and to create insurers and reinsurers with a more efficient allocation of capital that is strategically focused on lines of business where economies of scale can be achieved and efficient distribution channels built. Putting aside the largest transactions, the greatest volume of M&A activity has been deals such as bolton/ bolt-off transactions. Of the $81+ billion in transactions reported thus far in 2011, in terms of size, the vast majority of such deals were $200 million or less. These deals tend to be tactically driven and are often structured to transfer lines of business that were deemed to be inefficient (or, in the buyer's case, additive to existing lines of business) and improve the parties' balance sheet strength, operating performance and business profile in front of the rating agencies.

These deals are most often a reaction to the problems of growth during a soft market, and to the fact that M&A does not always produce the desired results. Buyers have looked long and hard before signing, and often have structured deals that stop short of an outright acquisition; for example, acquiring portfolios, renewal rights, marquee underwriters or MGAs that control distribution.

In the life sector, 2010 was dominated by two very large domestic deals; American International of Group's $15.5 billion sale of its American Life Insurance Company to MetLife Inc, and its sale of other subsidiaries to Prudential Financial Inc. Thus far during 2011, all but three reported deals have transaction values less than $1 billion and only 15 with a value in excess of $100 million. A common theme in these "smaller" deals appears to be sellers looking to exit from underperforming subsidiaries and redeploy their capital to more strategic endeavours. In a search for growth, insurers need to ensure that all business lines are generating sufficient returns, or alternatively divest themselves of these businesses to build elsewhere.

With an avalanche of legal and regulatory change affecting the insurance market, combined with slow economic activity, uncertain insurance and reinsurance pricing, questionable balance sheets, and sluggish domestic organic growth, many insurers in the US will continue to focus on alternative M&A deals. These will improve their financial statements and ease the burden of US insurance legal and regulatory compliance, as well as the resulting capital changes.

Canada

Canada's insurance sector is strong in global terms. It is of sufficient size that many players can achieve economies of scale, even if they focus on particular geographic areas or product niches. The sector is completely open to foreign competition, with the result that it has access to capital and world-class products. By most metrics, the sector has remained resilient in the face of the brutal volatility in the financial markets and the recession in the US, following the global financial crisis in late 2008.

However, Canadian insurance companies are having a tough time achieving growth internally and the conditions are right for M&A deals: the market remains fragmented, investment yields are likely to remain low for some time, returns are inadequate for many companies, and there is excess capacity. In addition, there is an increasing divergence in financial results between top tier and bottom tier performers. There are a number of players that are well-positioned as potential acquirers.

RSA Insurance Group, one of Canada's largest property and casualty insurers, is expected to complete the purchase of Expert Travel Financial Services Inc, one of the country's largest travel and health insurance distributors, in a strategic acquisition intended to create a better, vertically-integrated business model. Mike Wallace, SVP of Personal Specialty Insurance & Reinsurance at RSA, said, "This is part of our long-term strategy of consolidating the Canadian insurance industry, and I would say this is not the last one we'll do".

Other recent moves include Intact Financial Corp's $2.6 billion acquisition of AXA Canada to cement its spot as the largest property and casualty insurer in the country. Acquisitions are also enabling insurers to diversify their distribution platform and embrace new methods of interacting with clients. For example, in June 2011 Vebnet – Standard Life's employee benefits consultancy and technology provider – formally announced a tie-up with Vielife, the online health solutions and wellbeing consultancy acquired by CIGNA in 2006.

Brazil

The insurance market in Brazil is the largest in South America, and offers the potential to become a more prominent international insurance market across all disciplines. Recent economic stability, positive credit trends, and the regulatory reforms that have stabilised the currency and promoted domestic savings have all contributed to continued growth across the industry. However, there are almost 160 different companies operating in the Brazilian insurance industry, the most dominant of which tend to be controlled through the big commercial banks, so there are ample opportunities for consolidation.

One fly in the ointment for the Brazilian insurance industry is the recently enacted reinsurance regulations that require 40% of all reinsurance business to be allocated to Brazilian companies, rather than the current ruling granting them the right of first refusal. The legislation would further prohibit local insurers from ceding more than 20% of premium, related to coverage provided, to affiliated intra-company reinsurers located abroad. These regulations could threaten the market and severely reduce the availability of insurance in Brazil, according to a coalition of 18 international insurance associations from Europe, Asia and the Americas, which has set out its concerns in a letter to the Brazilian government and called for the regulations to be revoked.

In spite of continued regulatory hurdles, large multinational insurers cannot ignore the market's size and growth potential and will be looking to invest themselves further in Brazil, for example New York-based Travelers entered the Brazilian market by acquiring a 43% stake in surety insurer J Malucelli Participacoes em Seguros e Resseguros for $410m.

Bermuda

Bermuda remains one of the largest and most important markets for insurance globally. With 16 of the world's top 35 reinsurers, according to ratings agency A.M. Best, the island has the world's largest property-catastrophe reinsurance market, supplying 40% of the US and EU markets, as well as more than 1,000 captive insurers.

However, one of the biggest issues currently facing the Bermudan insurance industry is the US corporate tax policy bill, which would add to the tax burden on the island's reinsurers. The proposed legislation would stop non-US insurance groups with subsidiaries ceding some of the risk to an offshore affiliate reinsurer to reduce taxes. The Association of Bermuda Insurers and Reinsurers has strongly opposed the bill, suggesting that it would be counterproductive for the US since it would raise the burden on consumers and reduce insurance coverage.

The global nature of the larger Bermudan insurance companies is such that they would be able to mitigate the impact of an adverse change in US tax law, but conditions in the reinsurance market could spark a wave of consolidation.

The past decade saw waves of start-ups entering the market to take advantage of sharply rising rates in the aftermath of different catastrophic events. The so-called 'Class of 2001' was joined in 2005 by another gaggle of entrants, following a severe hurricane season in the US. As many as 20 start-ups entered the market during these two waves, among them larger, now well-established operators such as Axis and Arch. Now, after several years of falling prices, many reinsurers may be approaching the point where they can no longer boost earnings by releasing reserves from earlier more profitable years. Organic growth has been hard to find and valuations have been in a long period of decline. The industry has been trading at a substantial discount to book value since late 2008. This has already prompted some consolidation – including Partner Re's $2 billion deal to buy Paris Re and Validus's $1.4 billion purchase of IPC – to broaden portfolios and strengthen balance sheets. In July 2011, Validus launched a hostile takeover bid for Transatlantic Re, which could herald a new round of consolidation in the reinsurance market.

To view this article in full please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.