Most of us say "thanks" without thinking.
By Linda Koco
The number of mergers and acquisitions in the life and health insurance sector dropped nearly 40 percent in 2013, according to Deloitte LLP.
The slowdown may be a source of relief to insurance agents and advisors who have been concerned that too many deals in a year could harm industry stability or disrupt existing products and processes.
However, the annuity specialists among those producers will likely remain vigilant. That is because of another Deloitte finding — namely, that most of the deals in 2013 were focused on the annuity business. Since new company ownership has the potential to alter access to annuity markets and bring change to product design, annuity specialists who represent carriers involved in deals in 2013 will be perusing their contracts and products carefully.
Their vigilance will be sharpened by lessons learned from the carrier de-risking period of 2010 through 2012, during which the annuity business underwent major changes. Those earlier changes included not only new company alliances and deals but sometimes substantial product and market curtailments and changes to agency contracts as well.
To say that annuity professionals are hoping for a cool-down period where market and product changes are concerned is an understatement. Deloitte’s mergers-and-acquisitions discussion provides some insight into what might be possible.
Overall, the life and health insurance business saw just 17 deals in 2013, according to the firm’s 2014 Insurance M&A Outlook.
That’s down from 27 deals in 2012 and also from the 11-year high of 28 deals in 2010 and 2005.
Drawing from data supplied by SNL Financial, the Deloitte analysts assessed transaction activity by year announced. The transactions involve buyers in the United States and Bermuda who made acquisitions on a global basis.
With a few exceptions, the deals in 2013 focused on “expanding distribution into emerging markets and acquiring smaller, bolt-on capabilities,” the researchers said, noting this was not a period of “large transformative deals.”
In fact, the average transaction size showed “a significant decrease” from 2012. It was $133 million —down 57 percent from the 2012 average of $311 million per deal. (This average is, however, an eye-popping 269 percent above the 11-year low of $36 million in 2009, a time when most deal-makers pulled in their horns to wait out the Great Recession.)
Since most of last year’s deals entailed annuities, the smaller size of those deals suggests that the overall impact on the annuity business may not turn out to be as great as it may have been if the transactions were of the “large, transformational” variety. This might be welcome news to annuity producers who have grown weary of big transformational events in their business.
Looking to 2014
Year 2014 could be different, however. Momentum is building for increased insurance company mergers and acquisitions, the Deloitte analysts said. They pointed to global economy improvements, the presence of “fairly well capitalized” insurers and others with available funds, and a moderation in rate increases in certain lines (which could limit organic growth and spur interest in inorganic growth opportunities).
Key players in this world of potentially more deals could be private equity firms — buyers which accounted for approximately 40 percent of agent-broker deals in 2013, according to Deloitte.
“Historically, private equity buyers have tended to prefer acquiring insurance brokers over insurance underwriters,” the analysts wrote. That’s because brokerage is not asset-intensive and does not tie up capital for long periods. According to several other studies, brokerages that do a lot of employee benefits business or have other forms of recurring revenue streams also have become especially enticing targets for deals.
But the prolonged low interest rate environment is changing that traditional model. Now, more private equity firms are showing interest in life insurance and annuity carriers.
Annuities are particularly attractive to these buyers, according to Deloitte, noting that private equity firms can use their investing acumen to invest some of the annuity assets which back liabilities in higher-returning options than are typical for insurers.
“Also, the cash flows associated with annuity businesses are fairly predictable so they don’t create undo cash flow uncertainty for the private equity firm.”
Therefore, for 2014, Deloitte is predicting the private equity firms will continue their increased investing into the insurance industry through mergers and acquisitions, particularly in the areas of annuities, agent-brokers and some Bermuda run-off companies.
Buyers that “have already run the regulatory gauntlet” will continue to consolidate their insurance holdings, the analysts said, while other private equity firms will need to prepare for increased regulatory scrutiny.
[The “regulatory gauntlet” refers to the heightened policyholder protections that state regulators such as those in New York have required as a condition of approving a private equity firm’s purchase of an insurance carrier. In a related development, the Financial Analysis Working Group of the National Association of Insurance Commissioners (NAIC) has set in motion a proposal for NAIC to study private equity ownership of insurance companies, with an eye towards examining potential need for new or enhanced regulations.]
Another trend in 2014 is that certain private equity firms might become sellers instead of or in addition to being buyers. That could happen if firms, particularly those in the broker space, start looking to cash out of investments they made a few years ago, the analysts said, noting that this could stimulate additional mergers and acquisitions activity.
Based on Deloitte’s assessments, the year 2014 holds the potential for more mergers and acquisitions than last year. Whether such growth will result in significant transformative deals may be determined, in part, by how fast companies get off the starting line, the analysts said, noting that in 2013, the activity “started out strong but slowed early in the year and did not recover.”
Until the trend-line forms, agents and advisors, particularly those in the annuity business, will likely remain restive. They will also keep a close eye on market access and product changes.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at email@example.com.
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