By Simeon Rudin and Beatrice Lo
Recent private equity investments in high-profile deals, such as Bain Capital’s acquisition of esure and Apollo’s acquisition of Aspen Insurance, have brought European insurance sector deal values to record highs. Regulatory changes and regulators’ changing perceptions of PE firms have contributed to increased M&A activity, bringing new opportunities for insurance business investments from buyout firms and increasing competition for insurance assets. In our view, with more PE firms and other new entrants in the market for insurance sector targets, there will be a strategic advantage for firms that are well-prepared and familiar with industry-specific issues, which require navigation to achieve a successful deal.
Drivers of Insurance M&A
The implementation of the European Solvency II Directive (Solvency II) in 2016 introduced major changes to solvency and supervisory regulation for the insurance industry. As the industry has adapted to Solvency II requirements, the process of achieving capital compliance has required that European insurance groups examine their businesses. Such examination has resulted in these groups frequently identifying assets and businesses suitable for divestment. Brexit may lead to further review of assets and capital requirements, which in turn may create sale opportunities — for example, disposals by UK insurers of marginal EU businesses. This shuffling of assets (by sale of companies, transfers, or reinsurance, depending on the circumstances) has created opportunities for private equity to access insurance investments.
Further, regulators’ changing perceptions of PE firms have eased approvals for buyout firms as owners of insurance sector businesses. As more PE firms have successfully invested in regulated financial services businesses, and with the growing trend for longer-term funds, regulators have accepted PE funds as owners of insurers, reinsurers, agents, brokers, and other regulated entities. Perceived regulatory hurdles to private equity holding insurance assets, particularly in relation to life insurance (the long-term nature of the business was often viewed as incompatible with the typical three to five year hold periods of PE funds) are diminishing.
Regulatory Challenges for PE Firms Buying Insurance Businesses
However, insurance sector investments may present challenges for PE firms, including the need to comply with regulatory capital regimes such as Solvency II — both at the operating insurance company level and at the holding insurance company level. PE firms will find achieving the traditional leveraged investment approach within the regulatory capital requirements (which include limits on the amount and type of debt) challenging. Therefore, PE firms should consider careful and innovative structuring at an early stage to take account of the applicable regulatory requirements.
Breadth of Market Presents Varied Deals
M&A in insurance distribution and brokerage businesses has been particularly active, as market participants seek to consolidate and build scale in a widely fragmented market. Insurance brokers and agents have been attractive targets for PE firms because of the opportunity to grow quickly through acquisitions and the relatively lighter regulatory and capital requirements (compared to, for example, an insurer).
In addition, the life insurance sector has also been attracting PE firms looking to manage longer-term capital, by acquiring life and annuity businesses and then becoming managers of the premium income assets, and seeking to add value through their investment expertise to generate higher investment returns. We expect that the combination of these factors will lead to continued interest in the UK and European insurance sector from PE firms, particularly from longer-term funds.
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