March 10, 2015 Washington Wire

Interest Rates Sap Insurance M&A

WASHINGTON – Projected higher interest rates will spark strong merger and acquisition activity in the life and health insurance industry in 2015, especially in comparison to a slumping 2014 that was weighed down by the ultra-low interest rate environment, according to Deloitte’s annual Insurance M&A Outlook.

The report said that a 2015 interest rate hike could push be “an impetus to on-the-fence acquirers running up to expected rate action.”

That would be a sharp contrast to 2014, the report said, when M&A activity was “sluggish … reaching a low point in terms of the number of transactions over the past dozen years, and a decrease of approximately 30 percent from 2013.”

Another factor that could drive the 2015 market is pent-up demand, which has intensified because of high levels of excess capital, the report said.

The report said that while the number of transactions declined from 2013, the size of transactions grew. The report cited TIAA-CREF’s acquisition of Nuveen Investments for $6.25 billion, and Dai-ichi Life Insurance Co. Ltd.’s announced purchase in June of Protective Life Corp. for $5.58 billion. The deal was completed last month.

The report said the pace of M&A activity in the life and annuities space has been slow because buyers are looking but supply is limited. The report noted that 2014 M&A activity in the life and annuities sector were driven by life insurers either buying or selling asset management companies to take on or reduce their exposure to mortality risk, respectively.

The report said that one factor in the decrease in deal number could be that this segment continues to be adversely affected by the low interest rate environment, which is expected to remain a governor on the number of deals.

Among the reasons Deloitte analysts project strong M&A activity is heightened interest in U.S. investments by Japanese insurers dealing with a declining population and heightened interest in the life industry by private equity.

PE industry activity in the life space is on the rise, the report said, because annuities companies present steady cash flows and the ability for PE shops to reinvest assets at amplified returns, which they are increasingly able to achieve in today’s rising market. “As a result, there has been an uptick in consolidated blocks of life insurance business going to PE firms,” the report said.

Large Chinese and Korean organizations are also looking to acquire both life and property and causalty insurance companies in the US and elsewhere.

The report calls this “Inbound M&A” by foreign insurers, especially by Asian insurers, because “an improving US economy leads to more growth opportunities on both a relative and absolute basis compared to emerging economies, and foreign buyers seek to make a play before U.S. interest rates rise.”

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at arthur.postal@innfeedback.com.