Insurance deals insights: Midyear 2020

Robust insurance industry dealmaking collapsed in early 2020 with the advance of the COVID-19 pandemic, with deal volume from April until June plunging to the lowest level since the second quarter of 2013.

COVID-19 has compelled many insurers to shake up operations and business strategy, including adjusting to new ways of working and interacting. We expect M&A in the coming months to recover as companies use divestment to adapt to record-low interest rates and buyers with ample capital seek out new opportunities. The recovery may remain muted, however, as many dealmakers focus on their balance sheets and recessionary challenges.

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• The year began at a robust pace, with 168 deals announced during the first quarter totalling $35.5 billion in disclosed value. Three transactions were megadeals, accounting for $33.7 billion of the total during the period.
  
• Damage to the economy from the COVID-19 pandemic undercut dealmaking during the second quarter. Disclosed deal value fell to $544 million,excluding the significant reinsurance transaction between Athene and Jackson National, with only 100 announced transactions. Most previously announced deals closed as planned during the quarter, with the exception of an agreement between SGAM Covéa and Exor’s PartnerRe — an apparent casualty of the sharp economic downturn.
• During the first half of the year 89% of announced M&A volume involved insurance brokers. For several quarters, the subsector has been a focus for consolidation, fueled by the prospect of cost-cutting and greater efficiency from economies of scale.   

We see several factors influencing dealmaking in the coming months:

Record-low interest rates. The Federal Reserve, seeking to spur a recovery, may hold down interest rates for an extended period. Low rates would crimp yields across the insurance industry, especially for life insurers and annuities that hold long-dated assets. Companies seeking to sustain shareholder value will probably explore alternative strategies, including M&A. Some insurers may consider divesting capital-heavy, long-tail blocks of business that they no longer see as core to their strategy.

Ample dry powder. Record levels of deployable capital among private equity and corporate buyers will likely fuel a rebound of M&A during the second half of 2020. The low interest rate environment is expected to attract new investors and capital looking for an initial entry into the insurance market.

Rising insurance rates. Expectations that rates will rise in property/casualty, reinsurance, and specialty lines will probably spur investment and drive M&A.

InsurTech. COVID-19 has changed the way policyholders interact with insurers, brokers, and agents, accelerating the need for digital solutions. After reassessing their internal capabilities, some companies may try to close any service or product gaps through dealmaking with InsurTech firms.

Risks from regulation/litigation. Insurance companies should consider closely watching regulatory and litigation trends inside and outside the US, especially regarding business interruption coverage. A French court during the second quarter ruled that AXA should compensate a restaurant for losses stemming from a government-mandated shutdown. Although the impact of the ruling on US-based insurers is not clear, the stakes are big. Business interruption policies are a leading source of revenue for many U.S.-based insurers.

Opportunities to buy distressed companies may emerge as the full impact of the pandemic becomes clear. We expect that private equity and corporate buyers will be on the watch for assets selling at compelling prices.

Good beginning. M&A got off to a strong start for the third quarter. Allstate Corp. has already announced plans to buy National General Holdings Corp. for $4 billion in cash, and KKR & Co. said it plans to buy Global Atlantic Financial Group, Ltd., for $4.4 billion.