Merger and acquisition (M&A) activity in the global life and health insurance industry is expected to accelerate in 2016, although the focus of deals could be on small-to-medium players – rather than big ticket acquisitions.
A research note published by life reinsurer RGA in December explains that since 2011, mergers and acquisitions within the global Life and Health (L&H) insurance industry have grown at a compound annual growth rate (CAGR) of approximately 42%.
Based on publicly reported data1, the average deal size has increased significantly from $280 million in 2011 to $781 million in the year to October 2015.
The RGA report says between 2011 and October 2015 acquirers focused on the following regions:
- North America – $34bn (55% of deal activity)
- Asia – $18.5bn (30% of deal activity)
- Europe – $7.8bn (12.5% of deal activity)
Speaking to Life Insurance International (LII), Robert Zilg, an independent insurance consultant and previously head of EMEA strategy and planning at MetLife, says he expects "somewhat more" M&A activity in the life insurance market in 2016.
Zilg says: "I thought there would be more activity in advance of Solvency II." In Zilg’s view, although there is likely to be more M&A activity in the life and health insurance sector during 2016, these are likely to be focused on small-to-medium sized deals, rather than big ticket deals.
Martin Werth, the CEO of UK protection technology business, UnderwriteMe, believes it is inevitable there will be more M&A activity in the life and health insurance space.
In his view, there will be several players seeking to review their position given that scale is needed to invest in new business and distribution channels.
RGA notes the following factors as key drivers for M&A activity in the global life and health insurance industry:
1. Increasing market share – For example, Aviva’s acquisition of Friends Life for $8.8bn the biggest takeover announced in 2014.
2. Gaining entry into new markets – For example, to increase its presence in the UK. market and respond to changes in pension legislation, Canada Life, a subsidiary of Great-West Lifeco, has made significant moves, including the acquisition of Equitable Life’s run-off business worth $1.7bn and the purchase of Legal & General International (Ireland) Limited (LGII)
3. Divesting non-core businesses – For example, in 2013, Hartford Financial sold its Retirement Plans business to MassMutual and its Individual Life Insurance business to Prudential Financial, Inc. for a cash ceding commission of $400 million and $615 million respectively.
4. Changing regulatory environment – Generali, the largest insurer in Italy has engaged in a series of divestments to free up capital and improve its solvency ratio.
Swiss Re also noted in its recent report, Global insurance review 2015 and outlook 2016 / 17, that some primary insurers will shed unprofitable or non-core business while others will look to grow through M&A, thus creating opportunities for transferring blocks of in-force business to reinsurers and specialised consolidators.
"The need for these transactions is likely to remain strong, providing a growth opportunity for
life reinsurers," according to Swiss Re.
In conclusion, with the global economy beginning to recover, it is likely that M&A activity in the global life and health insurance industry will increase as companies seek new growth opportunities for growth and a chance to diversify.
Kurt Karl, Swiss Re’s chief economist was also upbeat when recently speaking to LII. Karl said: "The global economic outlook is looking good, particularly in the US and UK which will help global growth. Europe is muddling along, which has been the case for several years now. It is not looking robust, but is certainly growing."
Why M&A matters
The 2015 Global Insurance Market Report published by the International Association of Insurance Supervisors (IAIS) explains that M&As have the potential to create efficiencies in the provision of insurance, enabling insurers to improve, for example, the kind, price, amount or geographical reach of the coverage supplied.
M&As also have the potential to improve the financial condition of insurers, providing them, for example, with a stronger capital base or a sounder risk diversification horizon.
On the other hand, the IAIS notes that M&As introduce a wide and complex variety of new risk issues, from market dominance issues to corporate culture frictions, from overlooked risk-taking considerations to increased cross-border intricacies.
Timetric analyst’s view
Joel Dudley, financial services analyst at Timetric’s Insurance Intelligence Center explains how the centre of gravity in insurance M&A acquisitions has shifted from West to East in recent years, and how policy and regulatory changed have facilitated this trend.
Following the financial crisis, Western insurers engaged in a flurry of M&A activity in Asia’s emerging markets. Some were forced to retreat from their Asian outposts, having overextended themselves during the boom years. Others rightly identified the region’s markets – a compelling mix of low penetration rates and expanding middle classes -as an opportunity to achieve the growth that was proving elusive at home.
We are now seeing a reversal of this trend. Asian insurers, mostly based in Japan and China, are seeking to diversify into the US insurance market by acquiring mid-level insurance companies.
For Japanese insurers, the US market represents a chance to establish themselves as global players. Earlier this month, the president of Nippon Life told The Japan Times that the company was seeking acquisitions in the US because it is "the largest market in the world".
In the same article, the president of MS&AD Insurance claimed that their purchase of Amlin had "placed the firm in a higher rank."
With the outlook for Japan’s life insurance sector remaining weak, establishing strong operations abroad may be one way for Japanese life insurers to avoid becoming acquisition targets themselves.
Inbound interest from China in particular, which is now home to the fourth-largest life insurance market in the world, is seen as a major threat.
Shinzo Abe’s policy reforms are also at play. Abe has demanded that Japanese companies put return-on-equity (ROE) at the center of their strategy.
In turn, Institutional Shareholder Services has advised its asset managers to push for ROEs of 5% or more from the Japanese companies they invest in. Foreign acquisitions are a way to meet this target, especially since Abe’s policy of low interest rates has given Japanese companies easy access to the cash they need to fund these acquisitions.
For Chinese companies, by contrast, diversification into the US market represents an opportunity not for growth, but for stability. China’s turbulent domestic economy – characterised by the 2015 stock market boom, years of government-led overbuilding, and the persistent spectre of a hard landing – doesn’t offer the stable long-term investment opportunities that life insurers need.
As a result, Chinese insurers have been keen to snap up both real estate and insurance operations in the US. Anbang recently followed up its 2014 acquisition of the Waldorf Astoria hotel in New York by acquiring Fidelity & Guaranty Life, a US life insurer. China Life recently invested over $1bn in US warehouses.
As with Japan, these acquisitions are also driven by recent regulatory change. In 2014, the China Insurance Regulatory Commission passed new laws allowing insurance companies to invest up to 15% of their assets abroad.
So far, Chinese insurers have been cautious in experimenting with this new freedom. But if the forays of the likes of Anbang and China Life prove successful, we can expect far more outwards Chinese investment in the years ahead.