European insurance M&A in 2020
The factors driving insurance M&A in Europe have been reasonably consistent for the last few years, including high capital requirements under Solvency II, low interest rates and Brexit. For both the life and non-life sectors, there are also a significant pool of consolidators and runoff specialists with substantial amounts of capital to invest provided by private equity and other investors, as well as cheap acquisition finance.
Partly as a consequence of these factors, we have seen some new trends emerging. In the life sector, this includes a shift towards integrated wealth management with life insurers offering a broad range of pensions and other savings products with low or no policy guarantees.
Allianz and Aviva have been two of the most active companies in European M&A – Allianz as a buyer and Aviva as a seller. Aviva is currently undertaking a disposal program of its Continental European businesses in order to implement its new strategy focusing on its core businesses in the UK, Ireland and Canada. Allianz has been active on the buy-side with acquisitions in the UK of LV’s and L&G’s general insurance businesses, Aviva’s Italian general insurance business and also Aviva’s Polish life and general insurance business. Allianz is now the second largest general insurer in the UK. We advised Aviva on the sale of its Polish businesses and the French insurer, CNP, on the acquisition of Aviva’s Italian life insurance business.
Although German insurers have been active buying businesses outside Germany, there have been only a few M&A transactions in 2020 involving German insurance companies as targets. This is perhaps surprising given that the sale of Generali’s life insurance business to Viridium in 2019 was then heralded as a game-changer for the German life run-off market.
Amongst the insurance consolidators, Monument Re has been very active. We advised Monument Re on its acquisition of a closed Italian life business from Cattolica Life and on the acquisition of a significant block of European life and annuity reinsurance liabilities.
Finally, there were a number of insurtech investments made by insurance companies during 2020. Although these deals tend to be at the smaller end of the market, their strategic importance should not be under-estimated with many insurers looking to digitalize their customer interface and make IT enhancements to other parts of their businesses. Allianz X, the digital investment unit of the Allianz Group, for example, acquired a majority stake in Control Expert, a company specializing in handling motor insurance claims (we advised Allianz X on the deal).
Busy times ahead
We expect the factors which have driven insurance M&A over the last few years to continue to apply. Interest rates will probably not increase significantly, if at all, and the reviews of Solvency II being undertaken by the UK’s HM Treasury and by the European Commission are unlikely to result in significant reductions in solvency requirements. A number of insurers and reinsurers will be considering their strategies as a result of the difficult business conditions and the need to adapt their business models and invest, for example for the digitalization process which appears to have been accelerated as a result of the COVID-19 pandemic. Another factor for insurers to consider is IFRS 17 which is due to take effect on January 1, 2023.
Even in the more consolidated markets, there is likely to be activity with run-off specialists picking up legacy portfolios via a combination of portfolio transfers and reinsurance, to allow sellers to reinvest capital in new business activities. The scope of portfolio transfer processes in Europe varies from very basic mechanisms reflecting the requirements of Solvency II through to the “gold-plated” Part VII process in the UK. It was interesting to see the Italian transfer process extended at the beginning of the year to include transfers of portfolios comprising only claims.
One trend to look out for is the impact of consolidation in the European banking industry on the insurance industry. Bancassurance is used extensively in a number of European markets, including France, Italy and Spain. The recent takeover by Intesa SanPaolo of UBI resulted in the termination of UBI’s bancassurance arrangements with Aviva and BNPP (we advised BNPP in relation to the termination of their relationship with UBI).
The use of SPACs (Special Purpose Acquisition Companies) is another trend which we could see more of over the next few years. SPACs were one of the most significant factors for M&A in 2020, and so far in 2021 that trend has only accelerated. A total of U.S. 244 SPAC vehicles came to market in the United States in 2020, raising a total of US$78 billion, but that huge total had been reached by new U.S. listings in the first few months of 2021 alone. And while the vast majority of vehicles have to date been U.S.-listed, not only is that likely to change as markets in other jurisdictions such as Amsterdam try and grab some of the action, but their merger targets have been global in range.
To date, most of the SPAC activity in the insurance sector has been focused on insurtechs, where the SPAC model offers high-growth companies a simpler transition onto the public markets than the traditional IPO. Deals struck to date in 2021 include home insurance start-up, Hippo, with a US$5 billion equity valuation, and data and tech provider CCC Information Services, which achieved a US$7 billion equity valuation. However, a number of SPAC vehicles have been set up with wider insurance targets in mind. The views of regulators on SPACs as owners of insurance businesses will of course be important – the investment made by Liberty Holdings, a Cayman incorporated SPAC, in Phoenix in the UK in 2009 however demonstrates that it can be done, but may not be a particularly valuable precedent given the circumstances of the transaction.
How will IFRS 17 affect insurance companies?
IFRS 17 represents the most significant change to insurance accounting requirements in over 20 years. Not only will the new standard result in changes in profit emergence patterns, but it will also speed up the recognition of losses on insurance policies that are expected to be onerous. New disclosure requirements will also create greater transparency in relation to the profitability of different product lines, and this, together with the greater
consistency in accounting for insurance contracts which IFRS 17 will achieve across the insurance industry, will be easier for the market as a whole to assess the performance of different insurance companies. Insurance companies will undoubtedly be assessing the implications of IFRS 17 and making decisions in relation to the reshaping of their businesses and the possible disposal of non-core and loss-making portfolios.
Authored by Beata Balas-Noszczyk, Birgit Reese, Charles Rix, Francesco Stella.
