M&A: the biggest and most talked about unions in the insurance sector

“We expect to see a continuing surge in insurtech tie-ups, joint ventures and partnerships.” Kathrin Feldmann counsel at Clyde & Co.

· Aon/WTW deal faces "heavy scrutiny" in the time of COVID-19
· MMC/JLT union an "important catalyst" for a lot of future M&A activity
· Swiss Re ReAssure sell off looks to improve ratio and profit
· Trend among incumbents to buy insurtechs set to continue

Before COVID-19 took over the headlines, news of a major M&A was more often than not the biggest talking point in the industry. II looks at the deals that got tongues wagging in the last year.

While the impact of mergers and acquisitions (M&A) can be huge for the individual companies involved, the main reason they command such a close following is the fallout they can bring for others in the market.

This can be in terms of job losses, market share and the fact that such deals can push other leaders to lean towards a more acquisitive approach. Ongoing M&A activity is certainly something that industry professionals are watching, according to our exclusive survey.

Analysts offer their insight on the wider implications of some very large and influential transactions, not to mention those still in progress.

Big beasts and their deals

Aon & Willis: in the time of COVID-19

Before the coronavirus crisis began to dominate global headlines, one of the biggest news stories was the unveiling on March 9, 2020 of a $30 billion merger between major brokers Aon and Willis Towers Watson (WTW).

It’s the second time around for Aon’s acquisition of WTW after an aborted attempt on March 5, 2019. The renewed union is expected to have far-reaching industry implications.

However, the deal has sailed into a COVID-19 induced storm of market volatility, not to mention the heavy seas of regulatory scrutiny that it must navigate successfully.

Regulators alone have managed to derail major mergers in the past and Simon Fitzsimmons, director corporate finance at Mazars, says that the Aon/WTW deal could take over a year to go through as both brokers will be “heavily scrutinised” by the UK Competition and Markets Authority (CMA), while Aon itself has acknowledged the deal will take some time to get regulatory approval.

Commentators are questioning whether the added pressure of COVID-19 could delay or even terminate the deal.

Stefan Holzberger, senior managing director and chief rating officer at AM Best Rating Services, says: “The economic and financial market conditions certainly do not make the road to completion any easier.

“That said, we would expect due diligence and regulatory submissions to progress—albeit at a slower pace as regulators’ priorities get pulled in a different direction.

“As with the Marsh/JLT deal, the combined entity might be determined to be anti-competitive. This would most likely lead to the divestiture of a piece of the business, rather than putting the entire deal at risk.”

MMC & JLT

On April 1, 2019, Marsh & McLennan (MMC) finalised its acquisition of Jardine Lloyd Thompson (JLT) in what Fitzsimmons says was “one of the biggest deals in the insurance industry for many years”. The $5.6 billion deal was also, he says, an important catalyst for a lot of future M&A activity in the sector.

“The deal involved putting together two of the top brokers in the world to create a huge beast. But there were of course ramifications. A lot of people at JLT were not happy with the deal and spun out as a result,” says Fitzsimmons, adding that the deal also resulted in some job losses.

Not long after the merger there was a flurry of announcements as ex-JLT people announced new roles at other well-known firms in the sector.

In March 2019, MMC and JLT committed to divest JLT’s aerospace practice in order to address issues raised by the European Commission (EC), according to Fitzsimmons. JLT’s employee benefit business also faced scrutiny from the EC.

New York Life & Cigna

On December 18, 2019, New York Life, the third largest life insurer in the US, entered into a definitive agreement to acquire a unit of Cigna that sells life and disability insurance.

The deal, valued at $6.3 billion, is expected to close in the third quarter of 2020, subject to applicable regulatory approval and other customary closing conditions, according to Cigna.

Cigna says it expects to realise $5.3 billion of net after-tax proceeds from the deal and expects to use the proceeds of the transaction for share repurchase and repayment of debt in 2020.

But John Marra, partner at PwC, says: “I think it will take some time to close. The runway for the insurance space tends to be a long one in terms of reaching close. The complexities of the deal could make it a three to four-year runway.”

Swiss Re & Phoenix Group

In December 2019, Swiss Re agreed to sell its UK subsidiary—ReAssure Group—to Phoenix Group, valued at $4.27 billion. Swiss Re is to receive a cash payment of £1.2 billion, shares in Phoenix representing a 13 to 17 percent stake and be entitled to a seat on Phoenix’s board of directors. Swiss Re believes the transaction will have a positive impact on its Group Swiss Solvency Test ratio and economic profit.

Tokio Marine Holdings & Privilege Underwriters

In February Tokio Marine Holdings president and group chief executive officer Satoru Komiya confirmed that the firm had completed its acquisition of Privilege Underwriters, and its subsidiaries, known as Pure Group.
The acquired company is a US insurance group specialising in the US high net worth insurance market.


Technology

One trend that is set to stay is the acquisition of insurtechs by larger incumbents. Clyde & Co says that in the last 12 months there have been several investments in technology, including $250 million from Munich Re into California startup Next Insurance and $90 million from Japan’s Sumitomo Life into insurtech Singapore Life.

In November 2019, Aon announced an agreement to acquire digital insurance platform CoverWallet.

Kathrin Feldmann, counsel at Clyde & Co, says: “Technology can unlock access to new distribution routes, markets and customers, while at the same time delivering substantial efficiencies, resulting in a dramatic impact on the balance sheet.

“We expect to see a continuing surge in insurtech tie-ups, joint ventures and partnerships, and more involvement from tech companies entering the insurance market.”

Prudential Financial & Assurance IQ

Prudential Financial announced the acquisition of insurtech Assurance IQ for a sum of $3.5 billion in September 2019. Assurance is a three-year-old online direct-to-consumer insurer so the acquisition was a key development for M&A activity in the insurtech market.

Prudential Financial says that the acquisition of Assurance will add a large and rapidly growing direct-to-consumer channel to its financial wellness businesses, significantly expanding the total market of both companies.

The terms of the acquisition include upfront compensation of $2.35 billion and an additional earnout of $1.15 billion in cash and equity, dependent on whether Assurance meets some growth objectives.


Asia

FWD Group & Siam Commercial Bank

FWD insurance expanded across Asia with the acquisition of life insurance business of Thailand’s Siam Commercial Bank (SCB) for $3 billion. The deal, believed to be the largest ever insurance takeover in south-east Asia, enables SCB to distribute FWD’s life insurance products to its customers in Thailand for 15 years, according to FWD, which has spent $6 billion on M&A deals in the last six years.

The Carlyle Group & T&D Holdings

The Carlyle Group and Tokyo-based T&D Holdings agreed to acquire a 76.6 percent majority stake in Fortitude Re from AIG in November 2019, for the sum of $1.8 billion. According to T&D Holdings, the transaction provides capital for Fortitude Re’s plan to grow as a platform for acquiring and managing legacy insurance portfolios.

Private equity

Gallagher & Stackhouse Poland

In 2019, there was increased M&A involvement from private equity firms looking to benefit from the insurance sector. Following the signing of an agreement in December 2018, Gallagher announced the completion of its acquisition for Stackhouse Poland in April for £268 million.

The deal meant that Stackhouse had to leave private equity firm Synova Capital, which invested in Stackhouse back in 2014.
“The deal was significant in that Synova Capita was able to secure nearly six times invested capital from the deal,” says Fitzsimmons. “It is further evidence that private equity firms are doing really well in insurance and as a result of this, an increasing number of firms are now looking to break into the sector.”

Goldman Sachs & Aston Lark

Heavyweight Goldman Sachs’ merchant banking division acquired insurance broker Aston Lark in an investment deal worth £320 million in September, while at the same time private equity firm Bowmark Capital also reinvested in the company.

M&A in the year ahead

Covea & PartnerRe

In the first quarter of 2020, there has already been significant M&A activity. Covea has entered into a memorandum of understanding (MoU) with holding company Exor regarding the acquisition of reinsurer PartnerRe.

“While only in its early stages at the moment, the Covea and PartnerRe deal would be a huge transaction for the sector.

However, you don’t have a nearly $10 billion deal without some repercussions in terms of job losses,” says Fitzsimmons.
Exor says the deal is worth $9 billion and includes a cash dividend of $50 million to be paid to Exor before the closing of the deal. Close is expected by the end of 2020.

Ratings agency Moody’s has given the deal a negative outlook as it would lower capitalisation and increase earnings volatility.

Searchlight Capital & GRP

In February 2020, private investment firm Searchlight Capital announced that it will take a majority stake in Global Risk Partners (GRP). It is understood that the deal values GRP at £650 million.

“This deal will have ramifications in the UK retail broking and general broking space. GRP has purchased a number of small businesses, so they will have to figure out what the integration process will entail,” says Fitzsimmons.

Finally, with the Covid-19 virus significantly impacting events and businesses at the time of writing, it may also influence M&A activity.

James Swan, partner at McGill and Partners, says: “Many buyers are keenly watching for opportunities presented by the outbreak, with a number of private equity funds, sitting on unprecedented funds to spend on acquisitions, exploring opportunities to acquire assets that may be divested by distressed sellers or businesses whose valuations have fallen.”