Insurance deals insights: Year-end 2018

Deal value and volume overview

Deal value in the insurance sector rose 106% during 2018 compared with 2017, while deal volume decreased by 13%. There were 533 total announced deals during FY18, compared with 611 in FY17.

The insurance sector recorded 151 announced deals in the fourth quarter, with a total disclosed value of $2.2 billion. This compares with 170 announced transactions with a total disclosed value of $7.5 billion during the same quarter in FY17.

Fourth quarter activity pushed total disclosed deal value to $40.3 billion during 2018. This compares with total disclosed transaction value of $19.5 billion in 2017.

Insurance outlook

While insurance sector deal value rose $20.8 billion during 2018 compared with 2017, deal volume among insurance companies fell 13% during the year compared with 2017. The decline veils the intense focus on the sector by both private equity and publicly-traded companies. Prospective buyers believe they can make big improvements in target companies’ operational costs, underwriting profiles, risk selection, liability matching, and investment yield. Private equity, hedge funds, and other financial services firms see potentially significant unrealized value in blocks of variable annuities and long-term care insurance. We expect this strong interest to persist throughout 2019.  

Macroeconomic environment: While the economy is long in its current cycle, stable conditions will probably continue into 2019. Although the Federal Reserve raised the benchmark interest rate four times in 2018, persistent low interest rates and geopolitical uncertainty continue to constrain insurers’ revenues and profitability. Life insurers have used both divestitures and acquisitions to transform business models and manage the low-return environment.

Regulatory environment: Increased oversight has prompted insurers to alter their business models and strategies. Many firms exited businesses, often through divestiture. The Trump administration has favored a relaxation of regulation and the demise of the Department of Labor’s Fiduciary Rule may ease near-term concerns among insurers that use exclusive agents. Clarity about the impact of tax reform may also drive increased deal activity. In addition, the lower corporate tax rate could fuel the interest of private equity firms in insurance industry assets.

Legacy optimization and divestiture: Several major global insurers have reacted to low US economic growth with significant divestitures or restructurings, including shedding legacy, run-off, or non-core blocks of business. The Hartford sold its variable annuity products to a group of investors in 2018, freeing up capital to focus on property and casualty insurance. In June, an investor group including Apollo Global Management LLC, Reverence Capital Partners LP, Crestview Advisors LLC, and Bermuda-based Athene Holding Ltd., completed its deal to acquire fixed annuities and closed-block variable annuity businesses from New York-based Voya Financial Inc. Axa Equitable Holdings Inc. also completed its US initial public offering earlier in 2018. Other large insurance companies will probably reveal similar divestiture or restructuring plans.

Foreign investment: Asian and Canadian firms have expanded their footprint in the US insurance market during the past several years. Although foreign investors maintain a global appetite, regulatory and shareholder skepticism remain an obstacle to deals. China Oceanwide’s acquisition of Genworth has yet to close after receiving approval from CFIUS. That positive sign may open the floodgates for other foreign investment. The deal recently received all other required approvals from US insurance regulators, including from the New York State Department of Financial Services and regulators in North Carolina, South Carolina, Vermont, and Virginia. In a recent deal, China Reinsurance (Group) Corp. is seeking to extend its global reach with its completed acquisition of the Chaucer Group from Hanover Insurance Group for $865 million. Beijing-based China Re is state owned, having sprung in 2007 from the People’s Insurance Company of China.

InsurTech sees growing momentum in P&C: The fourth quarter of 2018 was noteworthy for InsurTechs in the P&C segment, with several marquee investments and partnerships:

• Cambridge Mobile Telematics (“CMT”), the leading mobile telematics and analytics provider secured $500 million in capital from SoftBank’s Vision Fund. CMT’s DriveWell platform has achieved a 34% decline in crashes and 10% reduction in loss ratio compared with the standard telematics black box. CMT has expanded to at least 20 countries, with partners State Farm, Liberty Mutual, Desjardins, Discovery, Admiral, MS&AD Group, QBE, AIG, and Insurance Australia Group
• Hippo Insurance (“Hippo”), a provider of tech-enabled smart home insurance, announced a Series C capital raise of $70 million, co-led by investors Felicis Ventures and Lennar. Hippo serves as a managing general agent in 14 states, and is backed by Spinnaker Insurance, Munich Re, and Topa Insurance Company
• Travelers Companies announced it will sell smart home security devices and sensors to its homeowners’ insurance customers through Amazon.

Distribution consolidation: Both private equity and corporates continue efforts to grow in scale by acquiring and consolidating distribution capability. The Hartford signed an agreement to buy The Navigators Group, a specialty underwriter, for $2.17 billion. Through the deal, The Hartford will expand its P&C product line and geographic footprint. Navigators is especially active in the energy, marine, and construction industries, with underwriting that spans Europe, Asia, and Latin America. American International Group also completed the acquisition of insurance program manager Glatfelter Insurance Group. The addition is a key element in AIG’s strategy to reposition its General Insurance business.

Insurance asset management: Insurers are increasingly looking to expand their wealth and asset management business by pursuing deals that add capabilities and asset classes while also extending customer reach. We expect this trend to drive deal activity in 2019.