According to a report from Moody’s, M&A and disposition activity within the US life insurance sector will continue in 2022 and 2023, however, weakening macroeconomic conditions and new regulatory hurdles will likely slow activity and somewhat reduce deal flow.
From a credit perspective, M&A and divestitures are generally good for sellers, says Moody’s, but less so for policyholders transferred to weaker third parties. The report also notes that the effects vary depending on the structure of the transaction.
It writes, “With over $1 trillion of legacy reserves currently on the industry’s balance sheets, M&A presents advantages to both buyers and sellers that will likely encourage the continued interest of private capital.”
Moody’s suggests that life insurers have been adapting from providers of interest-sensitive, guaranteed protection and annuity products to less capital-intensive businesses, such as fee-based asset gatherers and managers, administrators, and employee benefit and specialty health providers.
With the entry of private equity (PE) firms into the insurance sector, the report notes the emergence of business strategies that combine the interests and expertise of PE, life insurance, and asset managers.
It adds, “The PE acquirers are using offshore reinsurance markets to expand life insurance companies’ balance sheets, increasing assets under management and fixed income portfolio yields, a strategy that will extend deal activity.”
Expanding insurers’ balance sheets will also boost the industry’s growing share of illiquid portfolio investments, says Moody’s.
Increased interest rates enable buyers to earn higher investment returns on the acquired business, which may include less liquid and higher-yielding, often higher-risk assets.
However, a downshift in growth is clearly ahead, says the report, which is likely to slow activity. In addition, recent market volatility, sliding equity market prices, and rising inflation all pose risks to valuations that could reduce net transaction volumes.
The report notes, “The National Association of Insurance Commissioners (NAIC) is increasing its efforts to better understand the breadth of PE reach in the insurance industry, and the US Senate Banking Committee continues to probe and review the growing role of private equity companies in the insurance industry.”
“Policyholders and creditors are exposed to greater risk of loss if their PE owners have weaker credit characteristics and higher risk appetite than traditional life (re)insurance acquirers.”