Before the COVID-19 pandemic hit, insurance mergers and acquisitions (M&A) were all the rage in the United States. Fervent dealmaking was backed by what seemed like an endless stream of capital, flowing from various buyer profiles. In fact, there was so much capital interest in the insurance sector that demand almost outweighed supply, according to PwC transaction services partner John Marra. Early in 2020, competition in insurance M&A was rife and dealmaking was a very active process.
When the coronavirus pandemic ground the world to a halt in the spring of 2020, deal activity in the insurance sector slowed. According to S&P Global Market Intelligence, there were 168 insurance deals announced in the US in the first quarter of 2020, but only 100 deals in the second quarter. But the deal slump did not last for long.
PwC’s ‘Insurance deals insights: 2021 outlook’ describes a “roaring” return of M&A in the second half of 2020, with 222 transactions announced from the end of June to mid-November, totaling $10.9 billion in aggregated value. Standout deals include KKR’s acquisition of Global Atlantic for $4 billion, Allstate Inc’s acquisition of National General Holdings Corporation for $3.7 billion, and Great-West LifeCo Inc’s purchase of MassMutual’s retirement services business.
“In the spring of 2020, there was concern about investment portfolio issues, but we didn’t really see that,” said Marra. “In fact, a lot of insurance companies have weathered the storm really well on the investment portfolio side, and because of where interest rates have gone, many have made really substantial unrealized gains, which is always an interesting part of insurance dealmaking.”
Greg McGahan, partner in PwC’s deals practice and US leader of PwC’s alliances and joint ventures practice, noted that the “lower for longer” interest rate environment will continue to put pressure on investment returns and profits. He commented: “The persistently low interest rate environment […] is going to put a lot of pressure on capital and how people think about return on equity, return on capital, and how they efficiently and effectively manage that. Companies are taking a hard look at their individual books of business to figure out what is efficiently and effectively managed, and how they’re managing their capital base.
“I think the financial services marketplace, as a whole, has done a pretty good job at weathering the storm. In the banking sector, for example, there was a lot of uncertainty about loan losses at the end of Q1, into Q2 and Q3, and some banks booked up significant reserves, but to date, they haven’t seen the losses roll through. Insurance companies looked at this the same way. They thought they were going to have significant losses in their asset portfolios, but they didn’t emerge.”
Despite some challenges, the PwC deals practice expects “strong M&A activity to continue” as we head into 2021, driven by divestitures of non-core business, the hardening of specialty P&C markets, a desire for access to new distribution channels, and significant levels of deployable capital. According to Marra, new capital is particularly hot in the specialty commercial insurance space, where there have been half a dozen meaningful announcements of fresh capital into new Lloyd’s vehicles.
“About halfway through 2020, we saw a number of industry veterans partnering with new capital to get into the commercial insurance space,” Marra told Insurance Business. “The idea is that those folks don’t want to be associated with legacy liabilities. There’s a view in the industry that reserves are getting narrower. A lot of companies have released prior year reserves, and while their balance sheets look strong, they’re not as strong as they might have been a couple of years ago and there are still a lot of legacy liabilities waiting to play out. As a result, we’ve seen a lot of new capital coming into the space, supporting new vehicles with a Lloyd’s connection, and I think that’s definitely going to continue in 2021.”
Over the past few years, many deals have been triggered by a desire for new distribution channels. There has also been “a ton of interest,” especially from private equity, in insurance brokers, managing general agents, and third-party administrators, Marra added.
“While there was a short pause of about 60 days in the spring of 2020, the M&A market [for brokers, MGAs and TPAs] came back to life in the summer and it was very, very active,” he said. “It’s probably as active now as it was pre-COVID, and that’s because we’re seeing a return of multiples back towards the mid-teens, and a return in deal financing.”