Keywords: insurance industry, transactions, 2012, insurance M&A
In this 2012 Year in Review report we discuss some of the more noteworthy developments and trends in insurance industry transactions in the past year in the United States, Europe, Asia and Latin America, with particular focus on mergers and acquisitions, corporate finance, and the insurance-linked securities and convergence markets. We also examine certain regulatory developments that are impacting transactions in the industry.
Developments in Mergers and Acquisitions
Against a backdrop of sluggish economic growth globally, economic distress in Europe, a shifting regulatory environment and continuing low interest rates, insurance industry merger and acquisition activity remained fairly active in 2012, although down from 2011. According to Dealogic, 2012 saw global insurance mergers and acquisitions activity fall from 724 deals worth $68 billion in 2011 to 698 deals worth $54 billion in 2012. The aggregate value of transactions in 2012 was the lowest it has been in the past eight years; however, the second half of 2012 experienced a surge in deal activity that was more than double that in the first half of the year. It remains to be seen whether this momentum carries into 2013.
With several significant deals announced in the fourth quarter, 2012 proved to be an active year for life insurance M&A in the United States. According to SNL, aggregate announced U.S. deal value (involving U.S. targets) for the year was $4.2 billion, up from $775 million in 2011, but significantly less than the $21.6 billion reported in 2010, which was a year dominated by AIG's divestitures in the wake of the financial crisis. Although sales initiated to repay government aid continued to have an impact on the U.S. life insurance M&A market, drivers of activity in 2012 reflected basic strategic imperatives, with life insurers' exiting from non-core lines of business, several non-U.S. life insurers' exiting from the U.S. market, and the reallocation of assets to higher growth emerging markets. Financial buyers emerged in response as a source of buy-side activity.
REPAYMENT OF GOVERNMENT AID AND A FOCUS ON CORE BUSINESS LINES
In December 2012 the U.S. Treasury sold off its remaining stake in AIG in an underwritten public offering, the last step in transforming the insurer back into a fully private enterprise. (At one point, the government owned 92% of the company.) Another recipient of government aid in the financial crisis, Hartford Financial, managed to repay the government by 2010, but has suffered the adverse effects of the financial crisis on its annuities business, which had caused its share price to hover at depressed levels, in turn instigating shareholder activism and calls for action to improve share values. In response, the company initiated steps to redirect its focus to its core operations, primarily its property and casualty business, and embarked on an ambitious round of divestitures in 2012. By the end of the year, it had announced the sale of its individual annuity business to Forethought Financial Group at an undisclosed price, the sale of Woodbury Financial Services, its broker-dealer, to AIG for $115 million, the divestiture of its retirement plans business to MassMutual for $400 million and the sale of its individual life business to Prudential Financial for $615 million. Hartford continues to own significant blocks of its legacy annuity business.
NON-U.S. INSURERS EXITING THE U.S. AND THE EMERGENCE OF FINANCIAL BUYERS
In 2012, we witnessed the continued retreat by non-U.S. insurers from the U.S. annuity and life insurance markets. In particular, several Canadian and European insurers have followed this path, partly due to the need to shore up capital under heightened regulatory capital requirements and the uncertainty around the impact of Solvency II and partly due to the adverse impact of local or IFRS accounting rules applicable to certain types of U.S. annuity business. In addition, the lackluster U.S. economy and prevailing low interest rates have dampened prospects for growth. In 2011, Manulife Financial, the Canadian financial services group, sold its life retrocession business to Pacific Life Insurance Company, and in 2012, through its subsidiary John Hancock, ceded a multi-billion dollar block of U.S. fixed deferred annuities to Reinsurance Group of America in a 90% coinsurance transaction. In the latter part of 2012, following an extensive auction process, Sun Life announced the sale of its U.S. annuity businesses to a Delaware life insurer controlled by Guggenheim Partners for $1.35 billion in cash. The deal was structured as a sale of stock of Sun Life's Delaware and New York operating insurance company subsidiaries. Among European insurers and reinsurers, in 2012 Swiss Re announced the sale of its Admin Re U.S. life insurance business to Jackson National Life for approximately $660 million in cash, and Aviva agreed to sell its U.S. life and annuity businesses to Athene, a portfolio company of Apollo Global Management, for $1.55 billion in cash and $257 million of assumed debt. Aviva disclosed that the transaction is expected to improve its capital surplus coverage ratio by 17%.
As revealed by the Sun Life and Aviva divestitures, financial buyers have readily filled the shoes of exiting non-U.S. insurers. According to Beacon Research, private equity-owned insurance companies' total market share rose from 2.8% in 2011 to 9% in 2012. Their share of indexed annuity sales grew from 5% in 2011 to 15.4% in 2012. The trend is likely to continue as low valuations of insurance assets persist and private equity players become more comfortable with the insurance regulatory framework. For private equity firms there is an obvious allure to purchasing spread-based annuity businesses and increasing assets under management. Apollo, through Athene, has been a prominent example of this trend in the past few years. In addition to the Aviva acquisition, in 2012 Athene acquired Presidential Life, the New York annuity, life and health writer, for $414 million. In 2011, Athene had acquired Liberty Life Insurance Company for $628 million. For Guggenheim Partners, the Sun Life acquisition is its third significant life insurance acquisition in three years. In 2011, it acquired EquiTrust Life from FBL Financial Group and in 2010 it acquired Security Benefit Life.
EYE ON EMERGING MARKETS
Insurers faced with economic headwinds in more mature markets are increasingly looking to Latin America and select markets of Asia to find new growth opportunities. In 2012, U.S. life insurer Principal Financial lead the charge through its $1.5 billion acquisition of AFP Cuprum, a Chilean pension fund manager. As the mature U.S., European and Japanese markets present growth and expansion limitations, we would expect to see U.S., European and Japanese insurers looking to the Latin American and Asian markets where the penetration is relatively low among an expanding middle class.
Europe and Asia
The largest insurance deal of 2012 by some margin was the UK Bank HSBC's sale of its entire 15.6% stake in the Shenzen-based general insurer Ping An Insurance to companies controlled by Thailand's Charoen Pokphand Group and billionaire Dhanin Chearavanont for $9.4 billion.
Not only does this Asian deal rank as the 6th largest M&A deal globally across all sectors, it is yet another example of a significant transaction with roots in a disposal program triggered by the financial crisis. The Ping An deal is in line with HSBC's retreat from insurance to concentrate on core banking operations and bolster capital ratios. One point to note on valuation is the healthy premium and return booked by HSBC on its initial investment. There have been other recent disposals where vendors have exited at knock-down prices and certainly at a discount to book value. For regulatory and financing reasons, the sale was structured in two tranches. The first tranche representing 20% of HSBC's stake has closed. As of this writing, the second tranche remains subject to Chinese regulatory consent and is dependent on financial support of the China Development Bank.
HSBC was not the only global financial institution selling insurance assets during the year. Several other financial institutions also continued the path of ridding themselves of non-core assets in order to repay government aid. Dutch financial giant ING, which in 2011 had sold its Latin American insurance operations to Groupo de Inversiones Suramericana for EUR 2.65 billion, announced in 2012 the sale of assets including life insurance lines of business across Hong Kong, Macau and Thailand to Pacific Century Group for $2.14 billion along with a planned spin-off of its U.S.-based retirement, investment and insurance business. Similarly, The Royal Bank of Scotland, as part of the agreement to receive government assistance in 2008, floated its shares in Direct Line Group in an IPO on the London Stock Exchange in October 2012. In addition, ING announced the sale of its Malaysian life insurance business to AIA for $1.7 billion in a significant deal for AIA in its quest to retain its lead in the region over UK headquartered Prudential plc. Had the aborted attempt by Prudential to buy AIA from AIG in 2010 been completed successfully, the landscape might have been quite different. Now, with AIG's sale of its final stake in AIA at the end of 2012 raising $6.45 billion, we anticipate that AIA and Prudential will continue to compete to grow both organically and through acquisitions into 2013.
Notwithstanding the collapse of the deal to buy AIA, the Prudential has consistently focused on the growth potential of the pan-Asian life insurance market. Indeed, the UK-listed group now derives the biggest share of its profits from Asia. In November 2012, Prudential announced its purchase of the Thai life insurer, Thanachart Life...