Overcoming hurdles of insurance consolidation

With merger and acquisition activity high on the agenda for global insurance players, asset owners are increasingly turning to custodians for assistance with integration.

Over the past number of years there has been a ‘megawave’ of consolidation activity in the insurance sector. This has primarily been driven by reviews of non-strategic business lines, low interest rate environments and the search for greater yield.

A major challenge for any M&A activity is the post-merger integration. As a global custodian, BNP Paribas has extensive experience in helping clients identify efficient processes for clear integration and has often played a critical role in their success.

Globally, M&A activity in the insurance sector has remained buoyant over the last three years, despite the pandemic. In 2021, there were 418 deals[1], in 2020, there was a small dip with 407 mergers and acquisitions taking place, but this was only slightly down on the previous year’s 419 deals.

In 2021, the Americas was the most active region for M&A, with over 50% of transactions and Europe was in second place with 25% of transactions – led by the UK, Germany and Spain. While on a comparatively smaller scale, M&A activity across the Asia Pacific region was also very active, particularly in Australia which has seen a spate of high-profile deals.

What is clear from these figures is that, while some regions may have temporarily paused M&A activity during the pandemic, it has not derailed the multi-year global trend of insurance firm consolidation.

The largest deal of 2020 was the sale of UK-based RSA for £7.2bn (AU$13.6bn) to Canadian Intact Financial Corporation and Scandinavian insurer Tryg, which will result in the breakup of one of the FTSE’s 100 oldest companies[2].

The sale of UK insurer Hasting Group Holdings for £1.7bn (AU$3bn) to Finnish insurer Sampo and Rand Merchant Investment Holdings, a South African financial services investment company, is also part of the global M&A trend.

According to David Pember, Head of Sales, Relationship Management and Marketing Australia at BNP Paribas Securities Services, has followed the global trend and there has also been increased M&A activity in the past few years.

“Some of the key deals noted in the market were from well-established brands. Since 2019, TAL acquired Suncorp Life and Westpac Life; Zurich Life & Investments bought ANZ Life; AMP divested AMP Life and sold to Resolution Life and AIA picked up CommInsure. Locally it has been a very active arena,” he says. 

Vera Delvoye, Asset Owners Segment Strategy Lead for BNP Paribas Securities Services says the consolidation trend first began in the life sector and moved to non-life in recent years.

“The search for greater scale will remain a strategic priority. We are seeing an evolving landscape also in the non-life sector given the tough market conditions and additional regulatory requirements. With the large players buying up competitors’ portfolios we are seeing these insurers gain greater economies of scale, efficiencies and access to new domestic markets and international markets,” she says.

We are also seeing niche actors such as private equity firms enter the insurance market, fuelled by the availability of cheap capital and substantial dry powder which is ready to be deployed on insurance M&A opportunities. These asset owners are focusing on the core business and disposing of unprofitable assets, with a view to reducing long-term liabilities on their books.

Challenges of insurance mergers

BNP Paribas Securities Services has been involved in several of the largest insurance M&A deals in recent years, including three out of the four top transactions in Australia, significant transactions in Portugal and the Netherlands, and several deals in the U.S.

According to Sean Moran, Global Relationship Manager, BNP Paribas Securities Services, insurance companies undergoing mergers can face a range of hurdles.

“We observe that valuations on the target insurance company are generally the first challenge for any transaction and detailed analysis has to be completed on profitability, revenues, liabilities, technology platforms, regulatory requirements and restrictions which affect the price,” he says.

Getting regulatory and competition authority approval is another key undertaking. Regulators are focusing closely on these deals as the underlying clients and policyholders tend to be the general public. The ongoing trend of reinsurance company formation and growth through acquisition has created a need for bank lending products that offer credit enhancement and contingent sources of liquidity. For example, in the U.S., insurance regulation may require the use of letters of credit to support the maintenance and performance of the underlying reserve that is supporting the acquired block.

In addition, a bank letter of credit product can be used to support the underlying insurance book in order to provide a level of comfort to the ceding insurer with regard to the management and stability of the underlying reserve being managed by the assuming insurer. These often provide an attractive mitigation risk to the transaction and assist in timely execution. 

Mr Moran says: “Once deals have been approved, then another work stream kicks off in terms of integration for both entities. Typically, we see transitional service agreements in place, where the seller (or its parent) continues to provide services to the buyer for a transitional period.

“Complex activities such as investment accounting and regulatory reporting can also be highly complex and are often overlooked in terms of set-ups times and operational and technology requirements,” he says.

Mr Pember added that these challenges are universal and are also being faced by insurance firms undergoing mergers in Australia.

“Across the board there is a great deal of time, effort and research that needs to go into any potential merger before a deal can get off the ground,” he says.

Operational impacts

From an operational perspective, merging insurance companies are seeking to reduce costs, create efficient operating models and combine technology platforms in order to achieve their business goals.

However, Mr Moran says M&A activity can be labour intensive, requiring senior resources in business management, project management, legal, operations, tax, risk, IT and compliance, as well as external resources in these areas.

“The impact on people is often underestimated during a merger process. A key risk is a clash of cultures between the organisations and there may also be potential layoffs and increased workload and stress for remaining employees who are under pressure to make the merger work,” he notes.

These changes can lead to less engaged employees and staff turnover particularly if they are not incentivised.

Mr Moran recommends organisations put together a detailed communication plan to the market, policyholders and staff to ensure everyone understands the ownership change and the benefit it will bring.

Insurance companies often reach out to their custodians during the acquisition process, for assistance with both pre- and post-merger activities, including fund administration, investor services, middle office outsourcing, investment accounting, regulatory reporting, collateral management, liquidity solutions and more.

“In the Australian market we have seen significant transformation in the way organisations are working. For example, corporate activity that has required transformational operational change to support the dislocation from one business to another but also the complexity of going to another manager after moving out,” Mr Pember says.

M&A outlook

Over the next five to ten years M&A and insurance back-book consolidation is expected to accelerate in a post COVID-19 world to enable existing players to release capital, enter new geographies and access faster growing developing markets (Latin America and Asia), find capital-light, fee-based businesses,  enable technological transformation and build capacity for cost efficiency and profitability.  

The current market environment is creating organic opportunities for deal makers and there has also been an increase in private equity backed firms and traditional insurance companies making joint bids on insurance books, which is likely to be a trend in the future.

Ms Delvoye expects a surge in M&A activity in the coming years.

“We are seeing many companies reviewing their approach and believe that the current fundamentals driving M&A will persist. Closed book consolidation will be an increasingly global driver of M&A. Strategic partnership with asset servicers is essential to improve the back-office efficiency of newly acquired businesses.

“Having worked with more than eight clients on many complex deals globally and particularly in Europe[3] over the past three years, we will continue to partner with clients locally to help them explore the opportunities and make the consolidation process as seamless as possible,” Says Delvoye.

At BNP Paribas we are well placed to support clients in this process. Please feel free to contact your local BNP Paribas representative to find out more information.

[1] Clyde & Co Insurance Growth Report 2022

[2] BNP Paribas Securities Services – internal research: “10 Standout European deals that shaped 2020”.

[3] BNP Paribas Securities Services Germany is the preferred custodian for insurance consolidators in Germany, which accounts 87% (i.e. €45bn AuC) of the external run-off securities portfolios at stake. We also supported the migration out and in of the two largest run-off transactions in this market.