Private equity driving activity in insurance sector despite ‘lackluster’ deals market

Increasing interest from private equity is expected to support steady activity in the insurance deals market, during a time when other sectors are not experiencing comparable volume, according to PwC’s 2024 Midyear Outlook Report.

Private equity involvement in insurance books through acquisition, reinsurance and sidecar vehicles in the life insurance and annuity sector in particular is trending upwards. While, for property and casualty insurance, private equity is the largest investor in the brokerage space.

“Broadly speaking, at a high-level, macro view, the deal markets in 2023 and 2024 have been lackluster at best, relative to what we saw in the prior couple of years,” Mark Friedman, insurance deals leader, PwC U.S., told InsuranceNewsNet.

“That said, we actually are seeing more transaction activity in the life and annuity space than we did ever before. Transactions are taking on different shapes and forms.”

More capital in insurance

There were 145 announced insurance transactions, representing more than $34 billion in deal value, from mid-November 2023 through April 2024. This is a decrease in volume from the previous period, which saw 318 announced transactions; but an increase in value from the $11.2 billion of the previous period.

Some of the biggest announced brokerage megadeals reported during this period include:

• Aon plc’s acquisition of NFP Corp.: $13.6 billion
• Arch Insurance North America’s acquisition of Allianz’ U.S. MidCorp and Entertainment insurance business: $1.4 billion

While interest rate uncertainty could be impacting the insurance brokerage deal market, Friedman said insurance transactions remain “as active as ever.”

“We’re seeing more capital being deployed on a relative basis to the insurance sector, insurance brokerage in particular, than some of the other sectors that have had headwinds in terms of growth,” he said.

Sector trends

PwC noted the lower number of deals in the L&A market could have been impacted by regulatory changes by the Bermuda Monetary Authority.

At the same time, however, Friedman pointed out that dealmaking in the sector has shifted from large acquisitions to increases in reinsurance, which aren’t included in the data. Rather, he described it as being the “beneficiary” of the current market environment as well as other factors.

“In addition, there’s been, over the last decade or so, increasing interest on the part of private equity to leverage the lower cost of capital that insurance companies have, and to manage insurance companies’ assets, and we’re seeing that manifest itself in various shapes or forms,” he said.

He explained that this trend is driving many of the PE asset wealth management companies to establish their own insurance platforms and solutions groups.

“So, the demand far exceeds the supply and, as a result, we’re seeing increased activity as well as increased valuations on the life and annuity side.”

Meanwhile, the P&C sector in general saw record profits, likely due to declining inflation, higher interest rates and higher return on investments.

Friedman noted that P&C companies had raised rates between 2022 and 2023 to account for replacement costs. But now that inflation has come back down, they are benefiting from the higher rates that are still implemented.

“It’s been a very profitable time,” he said.

Private equity involvement

Growing interest from private equity is expected to continue, which will likely drive activity in the insurance sector.

“There’s a ton of dry powder and committed capital in the private equity sector, and the insurance brokerage business has been one that has been very much of interest due to its stable returns,” Friedman noted.

He added that, for P&C, while there are standalone private and public companies, most activity in mergers and acquisitions comes from the private equity side.

For L&A, he said the continuing shift towards private equity involvement, particularly where asset management is concerned, could translate into a different profile of guarantees that will be offered in the market.

“There’s a lot of interest, and we see continued renewed interest, from asset managers that are not yet in this space. There’re still new market entrants entering the market, as well as those that are in the market looking to grow their portfolios to achieve real scale.”

He added that this shift is not only an “optimization play”, but a question of whether legacy insurance companies will be able to compete in tomorrow’s market in a spread business such as fixed annuities without the asset management capabilities of their competitors.

Asian market interest

Friedman also noted there has been increasing investment interest from Asian markets. Regulatory changes are creating capital strain on some Japanese insurance companies particularly, and leading them to seek financial reinsurance through some of the same private equity-backed platforms providing solutions to the U.S.

“Private equity asset managers are looking to aggregate assets at scale, and there’s a significant amount of enforced business in Japan,” Friedman said.

Rayne Morgan is a Content Marketing Manager with PolicyAdvisor.com and a freelance journalist and copywriter.

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Rayne Morgan is a journalist, copywriter, and editor with over 10 years' combined experience in digital content and print media. You can reach her at [email protected].