While certain stakeholders have decided to exit the continental market, others have consolidated their presence. The largest series of disposals in continental Europe was undertaken by Aviva as part of its strategy to focus on its business in the UK, Ireland, and Canada. Aviva disposed of its insurance business in France to Aéma for €3.2 billion, and its life insurance business in Italy to CNP Assurances for €543 million (on which Hogan Lovells advised CNP Assurances). It also sold its general insurance businesses in Italy for €330 million and in Poland and Lithuania for €2.5 billion, both to Allianz, which has separately further expanded its activities in Southern Europe with the acquisition of a majority stake in the Greek insurer European Reliance in a deal worth €207 million.
In Germany, which is a market where, apart from legacy business transactions, the opportunities for merger and acquisition in the insurance industry are scarce, mutual insurer IDEAL has acquired myLife (on which Hogan Lovells advised IDEAL).
In the UK, a number of well-known insurance groups have made disposals, including Swiss Re, which disposed of its remaining shareholding in the Phoenix Group Holdings Plc, the life insurer, for approximately £440 million following its disposal of a 6.6% shareholding in June 2021, and Munich Re, which disposed of 4% shareholding in Admiral, the home and motor insurer, retaining a holding of about 6% of Admiral’s shares. In the meantime, private equity houses have continued to pursue their acquisition strategies, as illustrated by Cinven’s recent arrangement to acquire International Financial Group Limited (IFGL), a life insurance provider of cross-border, long-term savings products. It will be interesting to see how private equity firms respond to higher interest rates. Leverage is fundamental to private equity investment and higher borrowing costs will reduce potential returns – but equally there will be opportunities for investment as a result of lower company valuations, and the insurance industry may be more attractive in a higher rate environment than other sectors.
Reinsurance
The reinsurance industry has also been active with Covéa completing its acquisition of Partner Re from Exor for $9 billion. Following clearance from the European Commission in Q2 2022, and subject to satisfaction of customary regulatory clearances, the Bermuda-based reinsurer will join the Covéa group, which has long been waiting to diversify its activities.
Legacy business opportunities
The appetite for legacy business opportunities has not been dampened either with transactions generally increasing in size. The drivers behind these transactions remain the same: for sellers, the release of solvency capital and removal of costs risks, for example, arising from legacy administrative and IT systems; and for consolidators, the need for new portfolios as existing business runs off. Whether structured as share or asset deals, the sector is therefore reasonably active with Legal & General acquiring Newell Rubbermaid’s pension scheme for £225 million and Swiss Re acquiring Champlain Reinsurance Company, a Swiss-based run-off reinsurance captive member of Rio Tinto Alcan, in a legacy transaction relating to risks arising in Continental Europe, the U.S. and Canada. In Ireland, Phoenix Group has entered into an agreement to sell Ark Life Assurance Company - a closed book business which manages heritage savings and protection products in Ireland - to Irish Life Group, for a total cash consideration of €230m. In France, a portfolio of life insurance and capitalization policies mostly invested in unit-linked with assets of €2.1 billion has been transferred from Allianz France to CNP Assurances. This transaction is in line with CNP Group’s strategy to increase the share of assets invested through unit-linked products in its savings portfolios, and is, at the same time, consistent with Allianz France’s decision to actively manage its portfolio of life insurance policies while continuing to bring its customers attractive insurance products. In Germany, AXA has entered into an agreement to sell a closed large life and pension insurance portfolio to Athora for a consideration of €660m, and Zurich has entered into an agreement to sell its legacy traditional life insurance back book in Germany to Viridium. Both transactions are still subject to customary closing conditions but will likely revive the run-off market in Germany. Another way of dealing with the risk part of the legacy business and the IT systems legacy aspect is a dual approach where the risk is taken by an insurer or a reinsurer respectively, and the IT operations are being transferred on to an IT provider (the latter constituting an outsourcing); you would see such cases in the non-life sector as well as in the life sector, a number of which Hogan Lovells has advised on.
Activity in run-transactions has attracted the attention of EU regulators and specifically EIOPA. Until recently, supervision of run-off undertakings and portfolios was particularly challenging because of the specific risk profile associated with this business and the lack of specific regulation in Solvency II. In EU, this has recently changed with the recent publication by EIOPA of its statement on the supervision of run-off undertakings. The purpose of this statement is to ensure that high-quality and convergent supervision is applied to run-off undertakings/portfolios, having regard to their specific nature and risks while complying with the principle of proportionality and the prudent person principle under Solvency II. While this statement is addressed to national supervising authorities who are expected to apply strong scrutiny in the assessment of run-off undertakings and portfolios, it may increase the burden on the acquirers and sellers in connection with these transactions as they will have to provide detailed information on the underlying products as well as information on their strategies and business plans, with regard to the overarching regulatory objective of greater customer protection and supported by external actuarial reports. It is yet to be seen whether this new set of rules will result in a slowdown of the number of legacy business transactions or simply in these transactions taking longer to complete.
Brokerage sector
Despite the halt of the proposed merger between AON and Towers Willis Watson, which would have been the world's largest deal in the history of the insurance brokerage sector, a number of significant transactions have occurred in this sector. Howden has pursued its growth strategy with the acquisition of Italian broker Assiteca S.p.A. following its recent acquisition of Andrea Scagliarini and Tower in Italy and the acquisition of Aston Lark from Goldman Sachs Asset Management and Bowmark Capital. In Ireland, the acquisition of Marine & General Insurances Dac by Aston Lark Ireland is subject to regulatory approval and in the UK the acquisition of Global Risk Partners Limited by Brown & Brown, Inc is ongoing. As a consequence of the Russian invasion of Ukraine, a number of groups have withdrawn from their Russian business. In Germany, various new players including, but not limited to, private equity investors are active and participate to consolidate the brokerage market by acquiring small- and medium-sized brokerage businesses all across the place.
InsurTech
On the FinTech and InsurTech side, a number of fundraisings have successfully completed (a number of which Hogan Lovells advised on). Insurers and reinsurers have showed a growing interest in investing into InsurTech which can provide them additional capability and efficiency in a competitive market, particularly against non-traditional players offering disruptive underwriting tools and solutions to gain customers and simplify the customer journey. On the other hand, there have been quite severe setbacks to some InsurTechs in Germany. This can be explained to a certain extent by the position expressed by the German regulator (BaFin) which made it clear that it would not be willing to modify solvency capital requirements with regard to the way private equity funded entities would obtain their fundraisings. As a consequence, it appears that some licensed InsurTechs will consider converting their business into tech advice or brokerage services as opposed to carrying insurance risks, thus withdrawing from the direct insurance business.
Digitalization
A continuous and steady walk towards digitalization remains at the forefront of the strategies of insurers and reinsurers and has resulted in a number of strategic partnerships, including Reale Vida’s partnership with Munich Re, allowing it to implement automated underwriting across its life insurance operations in Spain, as well as the partnership between Tokio Marine and cyber analytics provider CyberCube, giving Tokio access to CyberCube’s suite of products. Another way for insurance industry actors to increase digitalization is by entering into joint ventures and alliances with regard to new business models, a number of which Hogan Lovells has advised on.
Bancassurance
Renegotiation of bancassurance agreements has resulted in significant transactions, particularly in Spain with the disposal by Mapfre of its 51% stake in Bankia to Caixabank in a €571million deal as a result of the termination of its bancassurance agreement with Caixabank. In Italy, historical partners CNP Assurances and UniCredit S.p.A. have renegotiated their strategic partnership (on which Hogan Lovells advised CNP Assurances) with the acquisition by CNP Assurances of UniCredit’s 49% stake in CNP Vita Assicura S.p.A. for €500m and the sale of 6.5% of CNP UniCredit Vita S.p.A. to UniCredit for €70m, and on the connected implications for shareholders' agreements and the distribution agreement of insurance products. Completion of this transaction is subject to customary regulatory clearances and is expected to complete in Q4 2022.
Opportunities amongst the uncertainty
Historically, economic downturns have led to declines in M&A activity. Some buyers will be put off by the market uncertainty but others will see opportunities as valuations decline or will want to continue to pursue their strategic plans. There is also the possibility of some distressed M&A involving insurance businesses for which regulatory capital requirements become a challenge. Anyone considering M&A in this market will, however, need to navigate the economic uncertainty.
Authored by Ghina Farah.
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