Your official life insurance M&A outlook for 2015

4. Private equity firms are here to stay.

Although all three experts agreed that private equity firms have been most active purchasing annuity businesses, it’s because of that activity that the current market has a lower supply of annuity businesses that they can acquire or merge with.

But, in the coming year, should we expect these firms to be active acquirers or continuous consolidators? “The less important issue that is extremely important, but less important than the opportunity than they see to acquire insurance assets, particularly annuity assets, is the need to consolidate what they’re buying and have an operation that runs effectively. The consolidation aspect should not be ignored, but the bigger opportunity here is for them to acquire more businesses,” said Cohen.

“I think that private equity has, to some extent, figured out the insurance industry how and where to make money. Now that the regulatory cloud has dissipated a little bit, the private equity crowd is here to stay,” Potter concluded.

5. Exposure and risk must be managed wisely. 

Everyone wants to climb to the summit of that mountain and experience what its like to acquire a competitor or what it means to merge with a new business venture and expand the market. In fact, that seems to be an industry expectation, says Potter. “Companies are going to be a little bit more adventurous and are looking to diversify into new markets. This is a trend that’s not going away. Companies are now seeing a need in response to regulatory changes to go out and look for new business lines. As an advisor, I’m always more comfortable when clients are going and looking into businesses that I know they know well, or markets that they know well,” he said.

Meanwhile, Lukan recommended that, “For U.S. companies that are looking to expand into new markets overseas or organizations who are coming to the U.S. for the first time, strengthening their capabilities around sufficient oversight and control of these acquired entities is really important. In some cases, this might entail opening like a regional office that can interface with headquarters that [may be] distant in geography,” but figuring that out before making a move is key to a successful M&A.

Lastly, companies have to study their markets very, very well before moving into “uncharted” territory, according to Cohen.

6. To succeed, companies must follow best practices and learn from past deals.

One of the experts, Nicholas Potter, stressed the importance of being a sort of “future teller” where one would look at everything about that M&A and see if anything could potentially become a regulatory issue. “[Companies should] constantly be sort of front running regulatory and litigation changes and thinking in advance where is that going to pop up. The single number one aspect is to avoid pitfalls and to think where the risk resides, even if it’s in the future,” Potter said.

On the other hand, Cohen said that another great lesson that companies should learn is about paying enough attention to the people. “The biggest reasons why these transactions fail are because of people, the culture, people’s job security, the approach that they’ve used to run their business. They’re having many conflicts. There are executives’ egos. There’s so many people here and getting them on the table, managing them, before and after, etc. It’s virtually impossible to pay too much attention [to these issues].”

7. Experts are split on whether there will be more consolidations.

When asked this question on a poll during the podcast, the experts were divided. For Lukan, the answer depends greatly on “if you’re solving for optimal industry-wide returns on capital, then yes, further consolidation would be necessary. For sure there’s a lot companies out there with a lot of fragmentation, then you’ve got an accelerator for transactions,” he said. And with the many M&As in the industry creating an environment of scarcity, making fewer companies of scale available, “It’s harder for deals to matter to companies that are able to afford a purchase,” Lukan said.

However, Cohen disagreed. He said that there’s no need for further consolidation and that, ”There’s no invisible hand saying, ‘Here’s the right number of [insurance] companies.’” But the companies that will remain will do so on their own merit by earning the right to do that. “If they’re profitable, if they satisfy the customers and their stakeholders, they will exist, and if they don’t, they will have to leave. And those that have to leave would be better served if they did sooner rather than later because they would get better values [for their companies],” he cautioned.

Meanwhile Potter said that the life insurance sector is one that does remain highly fragmented.

See also:

Reaching the middle market on their (digital) terms