It might not be the end of 2014 yet, but we’re already looking back at the mergers and acquisitions in the insurance industry this year and looking toward what 2015 might bring. A report back in March of 2014 from Deloitte found that M&A activity in the insurance industry had cooled down significantly compared to 2013. Some industry observers expressed “cautious optimism about 2014,” according to the report.
However, the three panelists at last week’s Insurance M&A Trends and Outlook podcast, hosted by SNL, beg to differ, if only a little bit. While emerging markets have shown some signs of slowing down — Bloomberg reported that China Life Insurance lost 2 percent on the Hang Seng China Enterprises Index (HSCEI), but Brazil gained 1.8 percent in their stock market — other observers estimate that emerging markets’ GDPs will increase from 35 percent to 50 percent in the next decade, according to Morningstar, encouraging industry players to continue to expand their markets internationally.
This trend, in tandem with growing emergent markets here at home — including the unexploited middle-market, millennials and the LGBT community — and expectations that the economy in the U.S. will experience growth for the remainder of 2014 seems to leave plenty of opportunities for insurance companies to expand.
Here are some of the comments and lessons from SNL’s podcast.
1. Although volume is down, we’re doing better than in 2013.
According to Tim Zawacki, moderator of the podcast and senior industry editor at SNL Financial, “Not only does the aggregate deal value compare favorably in the last two years, it also compares favorably to 2014. We’d only need a few aggregate deals to surpass 2013’s numbers. We’d need a blockbuster deal or two to approach 2010, however,” he added.
All of this despite the fact that there was a “sharp drop-off in the number of transactions announced” for life insurance M&A, Zawacki concluded.
2. Companies are looking for higher growth markets internationally.
Life insurance products are still seeing low numbers in terms of sales, combined with a retiring boomer market that is more concerned with “retirement or asset accumulation products” than life insurance, said Michael A. Cohen, principal of Cohen Strategic Consulting and former vice president of A.M Best Co. during the podcast. Despite this, the annuities sector is experiencing growth.
Another trend that has been taking over the industry is investment diversification, both of companies going overseas and in the U.S. from international companies taking interest in acquiring our markets, so says Nicholas Potter, a corporate partner of Debevoise & Plimpton LLP, co-chair of the firm’s Financial Institutions Group and a member of the firm’s Mergers & Acquisitions and Securities Groups.
“We saw deals like Dai-chi, a publicly traded company, responding to impulses from the heart of the Japanese government, looking to diversify investments into the U.S. It’s been very different from what we had been seeing in recent years. This year, what we have seen is a response to some significant macro-economic trends,” he added.
Also, life insurers managing their exposure to mortality risks marks another kind of trend. For example, “TIAA-CREF lowered exposure by buying Nuveen to increase their scale and strengthen exposure to asset management; those are some dynamics that we can see in terms of consolidation,” said Boris Lukan, principal, insurance M&A leader at Deloitte Consulting LLP.
3. Regulation is both a catalyst and an impediment for growth.
Nothing strikes fear in the hearts of the industry men and women more than a regulator sighting, or one at a table. And that is the industry’s feeling when it comes to the regulatory environment, “uncertain, unsettled and that undoubtedly would, generally speaking, tend to dampen M&A activity,” commented Lukan.
“On the other hand, heightened capital requirements are likely to force organizations to reconsider their commitment to certain lines of business which would perhaps stimulate supply, but heightened regulation has been an impediment to progress,” added Lukan.
And Potter seems to agree: “I think at the end of the day, you end up with one catalyst and one impediment and the companies are going to think about private equity. The capital rules are still evolving, but you’re seeing M&A in response to those rules. It’s a neutral or maybe arguably a positive in terms of the environment of M&A,” he said.