As we enter 2020, we can reflect on a remarkable decade for M&A transactions in the insurance market, primarily due to a combination of closed book consolidation and new sources of capital entering the sector – private equity in particular.

The motives for these two types of participants are very different. Consolidators are looking to combine multiple blocks of businesses, creating cost synergies via economies of scale and thereby creating a greater return on capital employed. In contrast, many private equity (“PE”) firms are focused on enhancing returns by changing the investment strategy, often leveraging their own asset origination capabilities and retaining valuable asset management charges within the PE group. The synergy benefit of using an insurer’s balance sheet as a source of stable capital may see the traditional PE holding period of 3-5 years extended in some cases – there is something of a split within PE firms, with some using the “classic” 3-5 year model and others looking at a longer-term investment.

The challenges that the two types of participants are looking to solve are also different – consolidators are addressing the issue that life insurers cannot operate efficiently as their scale reduces in run-off, whereas PE-backed firms are typically focused on traditional insurers being unable to generate sufficient returns from their assets in the continued low interest rate environment.

Considering the outlook for 2020, it is worth noting that these two key issues are not going away.

• Interest rates continue to be low, and there are fewer voices saying that they can’t possibly go lower.
• Insurers still struggle to operate effectively without scale, with the insurance industry (with some notable exceptions) having been slower than other industries to reap the benefits of automation, for example.

As at 1 January 2020, there were still 148 UK insurers authorised to sell life insurance products[1], demonstrating considerable potential for consolidation. Given the two key “issues” remain, the outlook for consolidation across the market seems just as strong as in previous years.

The consolidation market took an interesting twist at the end of last year as Phoenix announced the acquisition of ReAssure – buying out a company that it was frequently competing with for blocks of business. Whilst this could, arguably, reduce competition, it also gives opportunity for other players to become more competitive and could motivate new entrants. Of course, this depends on Phoenix’s appetite for new deals while integrating a number of businesses, and on the direction of travel under new CEO, Andy Briggs. This deal also sees the start of, arguably, the most complex integration in the UK insurance market given ReAssure’s recent acquisitions of the Quilter UK Heritage and Legal & General Mature Savings businesses while Phoenix continues to integrate the acquired Standard Life business.

Meanwhile, some PE firms will be developing their exit plans. This could also create greater consolidation, public offerings or a mixture of both. It is also possible we will see companies seeking diversification to improve capital efficiency – e.g. looking to take on mortality and lapse risks to diversify against longevity risk. Of course, there are various ways to access such risks that do not involve M&A, such as retrocession insurance and insurance linked securities.

Separately, there is continued forecast demand for de-risking of pension schemes meaning that the bulk annuity market is likely to be buoyant again this year. This could see new entrants to the market – not necessarily as primary providers. Reinsurance of deferred longevity risk is an area where there are current capacity constraints, so this could see new activity, or we could see more innovative approaches involving asset-risk transfer.

This all points to continued consolidation in the UK and European life insurance market for both proprietary companies and mutual insurers, albeit with the Phoenix / ReAssure transaction potentially changing the short-term dynamics in the UK. We are likely to see:

• Continued consolidation to take advantage of operational efficiencies at scale;
• Continued interest from PE firms seeking to overhaul existing asset mixes, potentially using their own asset origination capabilities to generate additional returns, while giving them access to insurance risks decorrelated to other investments in their portfolio;
• Mono-line companies potentially seeking diversification by taking on additional blocks of business or accessing these risks via other means;
• Significant post-acquisition integration activity; and
• Several Part VII transfers resulting from this continual consolidation.

It is therefore an exciting time for me to be joining Hymans Robertson as Head of Transactions. I am joining a team with great experience in both buy and sell-side M&A and Part VII transfers, including independent expert work, which is complemented by a huge wealth of insight into longevity assumptions and pricing. The combined experiences of the team enable us to support post-acquisition integration work, especially harmonisation of financial reporting methods and assumptions, internal models, matching adjustments and other LTG measures. We are, therefore, perfectly placed to support the industry with the continued consolidation, both pre- and post-acquisition.

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[1] Bank of England website