M&A in the Insurance Industry - 2022 Insurance Year in Review January 2023 - Willkie Farr & Gallagher LLP
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BRUSSELS CHICAGO FRANKFURT HOUSTON LONDON LOS ANGELES MILAN NEW YORK PALO ALTO PARIS ROME SAN FRANCISCO WASHINGTON 2022 Insurance Year in Review M&A in the Insurance Industry January 2023
2022 Insurance Year in Review
January 2023
To Our Clients and Friends:
At this time last year, as 2021 faded into a glowing mid-winter sunset, we took the opportunity in our 2021 Insurance Year
in Review to reflect on a busy and productive year for the insurance and reinsurance industry. Little did we foresee the
economic and global turmoil to come in 2022.
The most recent Consumer Price Index reading in November showed an increase of 7.1% over the preceding 12 months.
While this rate is down from June’s 9.1%, it remains substantially above the 4.7% average figure for full year 2021. In
short, the United States and much of the world is experiencing inflation not seen since the 1980s. Monetary actions by the
Federal Reserve and European, Japanese and other central banks to control inflation have adversely affected both bond
and equity markets. At this time last year the yield on the U.S. 10 Year Treasury Note was 1.51% and the S&P 500 was at
4,766. As this Year in Review goes to press, the ten year note yields 3.70% and the S&P 500 is off from the prior year-end
by approximately 20%. With bond and equity prices falling in tandem, some commentators noted that 2022 was the worst
investing environment since the late 1930s.
The consequences of Russia’s invasion of Ukraine, including the imposition of sanctions on an unprecedented scale,
dislocations in the global energy market and the leveraging of sovereign balance sheets have further impacted the
macroeconomic environment. Geopolitical tensions in the Asia-Pacific region, together with government responses to
the Covid pandemic, disrupted supply chains for much of 2022, and added momentum to an already extant debate in the
United States on the efficacy of offshoring and globalization.
These events generated powerful cross-currents in the insurance industry. Inflation adversely affected the bottom lines
of some insurers and reinsurers, particularly but not exclusively those paying property/casualty claims. At the same time,
the rising interest rate environment after years of low rates boosted book yields for most insurers. Similarly, the legacy of
the pandemic in terms of elevated mortality and morbidity continued to affect life insurance industry results. Accounting
rules, including the change in GAAP accounting for long-duration contracts and the renewed relevance of the treatment of
negative IMR on a statutory basis, created additional issues for the industry. And, as seems to be the case every year, the
weather contributed to another year of catastrophe losses, after a calm early hurricane season gave way to the devastation
of Ian in late September. However, notwithstanding all these macro and other challenges, the industry continued to fulfill its
mission of providing commercial and personal lines and life protection, investment and retirement products at a time and in
circumstances where these products are needed more than ever.
In this year’s review we focus primarily on M&A and other strategic activity affecting the insurance industry. Our review
concentrates on activity in the United States, London/Europe and Bermuda. We also discuss regulatory and other
developments which impacted M&A activity in 2022 or which may impact activity in future years, and offer a few thoughts
on 2023 industry trends. For readers looking for additional information about insurance industry legal developments, we
note that we prepare insurance capital markets reviews during the year (including our highly popular ’34 Act insurance
industry risk factor review, which comes out semi-annually), as well as quarterly reviews of NAIC actions and periodic
targeted insurance regulatory alerts, all of which are posted on our firm’s website. For convenience we are sharing a link to
our most recent insurance regulatory roundup from the December NAIC meeting in Washington D.C.
As always, we wish to thank our clients for the privilege of advising them on many of the more significant transactions and
issues involving the industry in 2022.
All the best for a better 2023,
Insurance Transactional and Regulatory Practice,
Willkie Farr & Gallagher LLP
2022 Insurance Year in Review
i
M&A in the Insurance IndustryI.Contents
Review of M&A Activity
I. U.S. Life and Annuity 1
A. Overview 1
B. Spotlight – Variable Annuities 2
C. 2022 – Noteworthy Life and Annuity Deals and Observations 3
II. U.S. Property and Casualty; Brokers and Agents 6
A. Overview 6
B. Noteworthy P&C Carrier Deal 6
C. Legacy P&C and Run-off 7
D. Deals Involving Brokers, Agents and Other Intermediaries 7
III. U.S. – Sidecars In M&A Deals and Other Transactions 9
IV. U.S. Insurtech 10
A. A Tide Going Out 10
B. Collecting Shells 11
C. Looking Forward 11
V. U.S. M&A-Related Insurance Regulatory Developments 13
A. NAIC Considerations Related to Private Equity Ownership of Insurers 13
B. NAIC to Consider Industry Request Regarding Statutory Accounting Treatment of Negative IMR 14
C. Principles-Based Bond Project 15
D. Company Division and Insurance Business Transfer Laws 15
E. Reinsurance Collateral Reduction for Reciprocal Reinsurers 16
VI. United Kingdom and Europe 17
A. Overview 17
B. Continuing Private Equity Investment and Broker/Fee-based Insurance M&A 17
C. Bolt-on M&A and Some Pruning by Large Insurance Carrier Groups 18
D. Shining a Spotlight on UK and European Legacy Liability M&A Activity 18
i. An Increasingly Competitive Market 18
ii. Diversification and Specialization 19
iii. Market Innovation 20
iv. A Strong Outlook 20
E. Regulatory Developments in the UK and the EU: EIOPA Confirms its Approach to Private Equity Investors in EEA Run-off Undertakings 21
i. EIOPA’s Concerns and Recommendations 21
ii. Considerations for Private Equity Investors 21
iii. Looking Forward 22
2022 Insurance Year in Review
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M&A in the Insurance IndustryI. U.S. Life and Annuity
structured credit which play to the strengths of the sponsor
and offer enhanced return opportunities. As an ancillary
I. U.S. LIFE AND ANNUITY
benefit, such assets, when managed by the sponsor, may
A. Overview be less likely to be mandated away to other managers than
might be the case with other assets under the sponsor’s
If we were looking for an aphorism to sum up 2022 M&A management.
activity in the life and annuity industry, we would be hard
pressed to find a better one than “the more things change, Private equity has for many years committed investment
the more they stay the same.” For another year, M&A capital to the P&C sector, particularly and most recently
activity was dominated by established life and annuity in broker/distribution, insurtech and specialty carriers.
companies seeking to restructure their businesses, and However, brokers are traditionally capital-light with
finding willing partners in newer, private equity-sponsored relatively small balance sheets and specialty carriers
insurance platforms. typically do not have as large a pool of investment assets as
is the case with life insurers, and the duration of their assets
The drive to restructure has arisen from multiple causes. tends to match the shorter duration of their liabilities, which
Until recently, the low interest rate environment has makes them less susceptible to yield enhancement than
made it more difficult for insurers to achieve their return would be the case with life insurance or annuity business.
objectives for certain lines of business such as fixed
annuities and made them more sensitive to the volatility We believe it would be overly simplistic to characterize
associated with other lines such as variable annuities. private equity interest in the industry as a search for so-
Variable product portfolios have also brought a penalty in called “sticky assets.” For one thing, it is relatively common
the equity markets, leading their issuers to consider ways in sponsor-backed reinsurance deals for an affiliate of
to part with them. Many restructuring insurers have sought the ceding insurer to retain management of a portion of
to redeploy capital to higher return lines, or alternatively to the investments backing the reinsured reserves, under
return the capital used to support these businesses to their a multiyear asset management agreement. This sort of
shareholders. Shareholders have attached and continue agreement often (but not always) covers more “plain
to attach a higher value to those insurers who consistently vanilla” asset classes where the sponsor would add
generate high levels of free cash flow and offer buybacks less value. Also, sponsors with the benefit of best-in-
and dividends to shareholders. Also, as will be discussed class actuarial, accounting, financial and legal advisors
later in this review, there is a perception – which in some engage in significant due diligence and seek to price
cases may be exaggerated – of heightened activist focus risk appropriately so that the acquisition of the target is
on the insurance industry, which has further sharpened attractive to their investors on its own merits. Following
managements’ taking a hard look at their businesses to buyouts, those sponsor-backed platforms add value by
determine whether they are best configured to generate their investment expertise, which in general exceeds
the highest return. All of these factors have over the last the cost of new asset management fees payable to the
several years created significant sell-side interest which sponsor. Also, as the sponsored reinsurers grow through
continued into 2022. acquisition, the benefits of scale and diversification and
aggregation benefits encourage further growth, which in
At the same time, and as discussed in our prior reviews, some cases may be organic as well as through M&A. As
private equity-sponsored life insurers have been a key force time passes, the dividing line between sponsored insurers
supporting much of the restructuring activity in the life and and traditional strategics has become increasingly blurred.
annuity industry over the last decade. For private equity
sponsors, life insurers offer a large pool of investment While commentators often point to Apollo, through its
assets that can be rotated into asset classes such as sponsorship of Athene Re, as being one of the first private
2022 Insurance Year in Review
1
M&A in the Insurance IndustryI. U.S. Life and Annuity
equity sponsors to engage in the consolidation of life and B. Spotlight – Variable Annuities
annuity blocks, this business model has a longer history.
Insurers such as Life Re (subsequently acquired by Swiss One trend that bears watching is the continued interest
Re), through its administrative reinsurance strategy, among some PE-sponsored reinsurers in acquiring
Protective Life, Wilton Re and Global Atlantic, among blocks of variable annuities with death and living benefit
others, had been engaged in the consolidation of the U.S. guaranties. Prior to Voya’s sale of Voya Insurance and
life insurance industry going back more than twenty years Annuity Company in 2018 to Apollo-managed funds and
in some cases, and in any event prior to Athene’s 2012 others to become their platform for acquiring blocks of
acquisition of Aviva’s U.S. businesses, Athene’s marquee variable annuities (now known as Venerable), there was
transaction. And it should not be forgotten that on the limited PE interest in variable annuity block acquisitions.
other side of the Atlantic, Sir Clive Cowdery through Variable annuities, particularly those with living benefit
predecessors to his Resolution platform was engaged in the riders, are complex insurance products which require
similar process of helping restructure the UK life insurance sophisticated risk management compared to products
industry during the same period. whose liabilities are less sensitive to equity market and
interest rate changes. Because of these risks the number of
Currently, many of the largest private equity firms have reinsurers with the expertise and appetite to reinsure VAs
sponsored life reinsurance roll-up vehicles. These include and to execute the hedge strategies required to manage the
Apollo, which closed its acquisition of the remaining risks inherent in these products is more limited compared
publicly held equity interest in Athene this year; Blackstone, to other life and annuity blocks. The demonstrated
which entered into a strategic partnership with Sir Clive appetite for and ability to complete VA transactions, as
Cowdery’s Resolution Group in October, after a busy 2021 some of these buyers (Fortitude Re, Global Atlantic, Talcott
which saw it enter significant deals with Allstate and AIG; Resolution, Venerable) have done, differentiates them from
Sixth Street, which added several large blocks of business other sponsor-backed buyers. The execution of VA deals
in 2022 to its Talcott Resolution platform, which was continued in 2022, and we would not be surprised to see
purchased by affiliates of that sponsor in 2021; Brookfield additional transactions in 2023.
through its American National acquisition; Carlyle through
its ownership interest in Fortitude Re, which closed a From a legal perspective, one of the principal structuring
significant deal with Prudential Financial in 2022; KKR, challenges in VA block deals has been managing the ceding
following its acquisition of a controlling interest in Global company’s counterparty risk to the reinsurer. In block
Atlantic in another of 2021’s life insurance acquisitions; reinsurance transactions the ceding company typically
Ares, which closed its acquisition and further establishment negotiates a right to recapture the ceded business if the
of the Aspida insurance platform in the last two years; and reinsurer’s financial condition or insolvency no longer make
Aquarian, which announced its acquisition of Somerset it an acceptable counterparty. Most sellers seek collateral
Re in 2022. Many other private equity sponsors have in the form of a funds withheld collateral mechanism and/
committed or indicated a willingness to commit capital or reinsurance comfort trust to ensure that on a recapture
to life and annuity M&A transactions. As the field has the reinsurer will be able to transfer to them assets to fund
become more crowded, the “buy-side” interest in these the reserves the ceding company will need to carry with
kinds of transactions has generally kept pace with the sell- respect to the recaptured business. Although managing
side interest, resulting in an active M&A market which counterparty risk through comfort trust and funds withheld
continued into 2022. collateral mechanisms is common to all life insurance and
fixed annuity block deals, doing so in the context of VA
rider reinsurance can be more complex.
2022 Insurance Year in Review
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M&A in the Insurance IndustryI. U.S. Life and Annuity
Because of the sensitivity of general account reserves for C. 2022 – Noteworthy Life and Annuity Deals
death and living benefit VA riders to equity markets and and Observations
interest rates, most insurers develop sophisticated hedge
programs to protect their balance sheets from the volatility In contrast to 2021 when Blackstone-managed funds
inherent in these kinds of annuity products. While hedge acquired Allstate Life, Brookfield announced its acquisition
strategies may differ among insurers based on balance of American National and Apollo announced the acquisition
sheet size, risk appetite, whether they are public companies of Athene’s public float, no significant legal entity
and other factors, from the ceding company’s perspective acquisition of a U.S. life insurer was announced in 2022.
the hedge assets are an important element to counterparty As previewed above, 2022’s active life and annuity M&A
risk mitigation. market was dominated by the acquisition of large blocks
of business. These deals were structured as reinsurance
As an (overly simplified) illustration, consider a reinsurer transactions, with supporting infrastructure assets and
which has hedged 100% of the equity market risk on a employees conveyed to the extent that administration of
ceded block of variable annuities where the only investment the block was transferred to the reinsurer.
option is equity funds. As equity markets decline the
reinsurer’s reserve requirement may increase. However, The year started off with the announcement of two of
assuming hedge effectiveness and a hedge strategy which the more significant of 2022’s transactions – Talcott
hedges 100% of this equity risk, the increase in reserves Resolution’s reinsurance agreement with Allianz Life
in our illustration would be funded by the increase in the (actually announced in December 2021, but close enough
value of the derivatives held by the reinsurer. As the to 2022 in our view for inclusion) and Talcott’s reinsurance
derivatives become more in-the-money, the derivatives transaction with Principal Financial Group (announced at
counterparty will be required to post additional variation the end of January 2022). In the Allianz transaction, Talcott
margin – essentially collateral to secure its obligations to Resolution and Sir Clive Cowdery’s Resolution Life reinsured
the reinsurer. This variation margin funds the increased approximately $35 billion of fixed indexed annuity liabilities
reserve requirement in our example. Conversely, as in one of the largest transactions of its kind. Of those
equity markets increase the reserves which the reinsurer liabilities, $20 billion were placed with Talcott Resolution
is required to hold for the ceded variable annuities would and one of its Bermuda affiliates and $15 billion were placed
decline, and the excess reserves would fund the variation with Resolution Life. Allianz Life continues to service and
margin that the reinsurer would need to provide its administer the ceded business, and retained management
hedge counterparty because of the increased value of the of a portion of the asset portfolio. In a very large transaction
derivative on the counterparty’s books. such as this one, the ceding company may seek to mitigate
its exposure to a single reinsurer’s non-performance
How to provide the ceding company with the benefits under the reinsurance agreement by contracting with two
of the reinsurer’s derivatives portfolio on a recapture reinsurers, in addition to negotiating comfort trusts or
can be challenging and implicates commercial, legal funds withheld collateral arrangements. However from
and operational issues. In addition, some reinsurers the ceding company’s perspective this diversification
may not hedge specific books of business as opposed to benefit must be weighed against the incremental difficulty
implementing a hedge strategy with respect to all of their of completing a three-way deal, and the resulting pressure
business. Addressing these issues in recent transactions on price, terms and conditions that comes from negotiating
has required commercial, financial and legal creativity. with two counterparties rather than one.
In late January, Talcott Resolution also announced a $25
billion reinsurance transaction with Principal Financial
Group. Under the terms of the transaction an offshore
2022 Insurance Year in Review
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M&A in the Insurance IndustryI. U.S. Life and Annuity
affiliate of Talcott agreed to reinsure approximately $16 assets across private credit, real estate and asset-based
billion of retail fixed annuities and $9 billion of secondary finance markets, with the total quantum of assets managed
guarantee universal life insurance from Principal. Principal by Blackstone expected to grow to up to $60 billion over
continues to service and administer the reinsured blocks. the next six years. The release also states that Blackstone
Further, an affiliate of Principal Life was appointed as and Resolution plan to raise $3 billion of new equity
investment manager for a limited portion of the transferred capital, including a $500 million strategic investment from
assets. Principal announced that it would use the capital Blackstone.
created by the sale primarily for share repurchases.
Although strictly speaking Prudential Financial’s
In an active year for Talcott, in October 2022 the insurer transaction with Fortitude Re is not a 2022 deal since it
also announced a reinsurance transaction with a subsidiary was announced in September 2021, given its size and the
of Guardian Life Insurance Company of America. Pursuant fact that it closed in April 2022 the authors of this review
to the transaction, Guardian, one of the largest U.S. mutual have determined to stretch the criteria for inclusion. Under
life insurers, ceded a $7.4 billion variable annuity portfolio the terms of the deal Fortitude Re acquired Prudential
to Talcott. Equitable’s reinsurance of a legacy block of VA Annuities Life Assurance Corporation. Included in the sale
business to Venerable in 2021 demonstrated the viability of is approximately $31 billion of in-force variable annuity
structuring sales of VA blocks which satisfy the pricing and account values primarily consisting of non-New York
risk management objectives of the ceding company. Since variable annuities with guaranteed living benefits that were
then, in addition to the Guardian transaction, Manulife in a issued prior to 2011. Prudential will continue to service and
2021 deal and Equitable in a 2022 deal with KKR affiliate administer the block. Unlike the Equitable, Guardian and
Global Atlantic as counterparty have also ceded significant Manulife deals referred to above, which were structured
blocks of VA business. as reinsurance transactions, the Prudential deal involved
the sale of a legal entity, albeit one without meaningful
The Equitable deal with Global Atlantic was announced assets and liabilities other than those related to its variable
in August 2022. Under the deal, U.S. affiliates of Global annuities.
Atlantic reinsured on a quota share basis approximately
$10 billion in general account and separate account As this report goes to press, American Equity Life has drawn
value. Equitable retains servicing and administration of the attention of an insurer controlled by an investment
the policies. In its press release announcing the Equitable group that is well-known for its PE investments and activist
transaction, Global Atlantic noted that the Equitable deal tactics. This insurer proposed a business combination with
was its second block reinsurance transaction in 2022, AEL, which was publicly rebuffed. Further developments,
having reinsured a $4 billion block of annuities in March. if any, have not been publicly reported. More generally,
we note that the insurance industry periodically draws
In one of the more novel transactions of 2022, in October the attention of activists, although the number of publicly
Blackstone and Resolution Life announced a strategic disclosed instances of significant activist involvement is
partnership with respect to closed block transactions, relatively limited compared with other industries. This may
including reinsurance in the life and annuity sector globally. be explained by the heavily regulated nature of the industry,
In the transaction, Resolution Life will become Blackstone’s technical issues resulting from differing interpretations
partner for new closed book acquisition transactions. under the holding company acts of the various states
A majority of Resolution Life’s existing equity holders which can complicate activist tactics, possible rating
are expected to roll over their investments into the new agency implications and the sheer complexity of insurance
structure. According to the press release announcing the companies – particularly life insurance companies – which
transaction, Blackstone will be Resolution Life’s investment require substantial investment in developing specialized
manager for certain key areas, including directly originated expertise to comprehend. The authors believe that the
2022 Insurance Year in Review
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M&A in the Insurance IndustryI. U.S. Life and Annuity
marginal effort of an activist campaign involving an insurer and the price paid for the block. To the extent capital is
exceeds that of a less complex business, which may itself involved, some reinsurers have made the point that there is
be a deterrent. However, with the growing interest of a cost and it is up to the ceding company to strike the right
sophisticated private equity groups in the industry, we may balance between risk mitigation and price.
see greater activist activity in future years.
We also observe that the allocation of regulatory approval
Before moving on to our next topic, we would like to risk continues to be a heavily negotiated contract provision.
conclude this discussion with some observations regarding Regardless of how this risk is allocated, we believe that both
block reinsurance transactions. First, to state the obvious, parties to the transaction are unlikely to want to announce a
sales of blocks of business which are structured as deal with respect to which there is not high conviction that
reinsurance are oftentimes more complex and difficult to it will be approved. While not all states will engage with
document than the sale of a legal entity. The complexity parties in a substantive manner prior to a deal being signed,
among other things is a consequence of the continuing we have noted recently a greater willingness on the part
counterparty exposure of the ceding company to the of certain regulators to provide guidance prior to signing.
reinsurer. Collateral structures (trusts, funds withheld, Where this is the case, we believe that, especially in cases
modified coinsurance) can go a long way to protect where the deal is sizable or the proposed transaction
cedents, but must be thoughtfully structured to achieve structure may involve a novel structure or terms, the
best results. As a result, deals structured as reinsurance parties should strongly consider availing themselves
are typically heavily engineered, and the negotiation of of the opportunity to engage with their regulators pre-
terms and conditions can be more protracted and difficult signing. Such engagement will often help facilitate the
than a legal entity deal. As many of our readers know, it negotiation of the regulatory closing condition and related
is sometimes the case that sales of legal entities involve regulatory approvals efforts standard. These provisions will
carve-out transactions pursuant to which policies which continue to be critical in both legal entity sales and in block
are outside the transaction perimeter need to be ceded by transactions where a regulatory approval is required. In
the target company to an affiliate of the seller or conversely, 2023, they may become even more hotly contested given
policies which were written on the paper of an affiliate the increased regulatory attention to private equity-owned
that are within the transaction perimeter and need to be insurers, as discussed below.
ceded to the target. Depending on the amount of business
being moved in or out of the target company, these kinds Finally, we note that the type of collateral mechanism –
of carve-out transactions can be as difficult to execute as even in deals where credit for reinsurance is based on
pure block reinsurance transactions. the accredited, licensed or reciprocal (RJR) status of the
reinsurer – can affect the counterparty credit risk capital
We further observe that notwithstanding the number charge. Accordingly, actuarial and statutory accounting
of deals that have been completed over recent years staff of ceding companies considering block sales structured
and the fact that there are a limited number of actuarial, as reinsurance should take into account any incremental
financial and legal advisers who handle most of the more capital charge when evaluating a buy-side proposal.
significant transactions, terms and conditions do not
reflect the same degree of standardization as in legal entity
sales. The customization is oftentimes a consequence of
the risk tolerance of the ceding company. Leaving aside
debates about what constitutes overcollateralization (and
whether regulators will agree with the parties’ views on the
topic), there is a clear relationship between the amount of
collateralization, how collateral mechanisms are structured
2022 Insurance Year in Review
5
M&A in the Insurance IndustryII. U.S. Property and Casualty; Brokers and Agents
formed to take advantage of market opportunities has been
impacted by alternative accordion capital vehicles such as
II. U.S. PROPERTY AND CASUALTY;
sidecars, as well as (until recently) relatively soft market
BROKERS AND AGENTS conditions.
A. Overview To the latter point, we note that certain P&C segments have
experienced substantially hardening market conditions
Large M&A transactions involving U.S. or Bermuda property
in 2022. As market conditions harden and become more
and casualty companies were rare in 2022. The only
profitable, it is more difficult to make the case for a sale
transaction announced involving consideration in excess of
unless the sale price reflects those conditions. Also, organic
$1 billion was Berkshire’s merger with Alleghany, which we
growth is an attractive alternative to business combination
discuss further below. Given the varied segments of the
activity during a hardening market. Conversely, in a soft
property and casualty industry, each of which has unique
market the benefits of scale, synergies and diversification
attributes and sensitivities, making general statements
make M&A activity more attractive. We further note that
regarding the drivers of M&A activity is not without risk.
with the increase in interest rates insurers’ book yields have
However, even at the risk of being second-guessed, we will
increased, further adding to their profitability.
go out on a limb and provide our perspective on the relative
absence of large-scale deal activity in 2022. Our final observation is that while large U.S. P&C insurer/
reinsurer transactions were rare in 2022, there was
First, as we noted in the cover letter to this Year in Review,
significant activity involving legacy books and run-off
the macroeconomic environment in 2022 was extremely
business, as well as brokers and MGAs, which we discuss
difficult. The war in Ukraine and its geopolitical and
below. Finally, M&A in the United Kingdom and Europe is
economic fallout, and the effects of anti-inflation measures
addressed in a later section of this report.
in the United States and other countries, have all made deal-
making on a large scale challenging, to say the least. Also,
B. Noteworthy P&C Carrier Deal
the effects of claims cost inflation, particularly in personal
lines, made it harder to earn a profit today and to predict On October 19, 2022, Berkshire Hathaway completed its
what the future will look like tomorrow. Uncertainty like acquisition of Alleghany Corporation, in a public merger
this adversely affects the risk appetite of potential buyers transaction worth $11.6 billion. As our readers know,
and is not conducive to deal-making. Further, these recent Alleghany is a conglomerate whose property and casualty
conditions are coupled with declines in excess capital and subsidiaries include Transatlantic Holdings, Inc., a leading
liquidity in recent years given pressure on investment global reinsurer; RSUI Group, Inc., which underwrites
portfolios in the low interest rate environment, weak wholesale specialty insurance coverages; and CapSpecialty,
underwriting results and top line growth. Finally, there is Inc., an underwriter of specialty casualty and surety
the perennial concern about taking over another company’s insurance coverages. The deal was originally announced on
back book, which affects M&A relating to P&C insurers. March 21, 2022. The acquisition is one of the five largest in
Berkshire’s history.
Further, over the last several years the number of potential
P&C targets has shrunk as consolidation has occurred This deal had several features which are quite unusual in
within the P&C industry. This is particularly the case in public company M&A transactions, and perhaps reflect Mr.
Bermuda, where consolidation has had a substantial impact Buffett’s oftentimes unique approach to transactions. First,
over the past ten years. It also applies in regards to U.S. Mr. Buffett made his highest and best offer at his initial
domestic targets. In addition, as we have discussed in our meeting with Mr. Brandon, and refused to increase it. He
prior year-end reports, the number of new companies being insisted, as well, that any banker fees paid by Alleghany be
2022 Insurance Year in Review
6
M&A in the Insurance IndustryII. U.S. Property and Casualty; Brokers and Agents
deducted from the price. Further, Alleghany received the enhanced importance of collateral mechanics in run-off
benefit of both a go-shop period and a subsequent no-shop reinsurance transactions remains to be seen.
period in which it could entertain unsolicited proposals, and
moreover the deal provided that Alleghany could accept In 2022, we saw a number of robust auction processes
any deal its board deemed a superior proposal made during for mid- and large-sized blocks of legacy business. We
either period, without the payment of any break-up fee. believe this reflects greater industry acceptance of run-off
Post-signing, more than 30 potential buyers were contacted divestment as a strategy, as well as increased focus from
by Alleghany’s financial advisor, but the company received brokers, investment banks and intermediaries. Outside of
no alternative proposals. the insurance market, large U.S. industrials, both public
and private, continue to divest companies with long-
C. Legacy P&C and Run-off tail asbestos (and sometime environmental) liabilities
while retaining their operating assets. Run-off insurance
As rates harden, property/casualty carriers are experiencing carriers and a number of private equity-backed non-
more pressure to optimize their capital bases and rates of insurer acquirers are prepared to acquire these long-term
return. As a result, selling legacy blocks of run-off business liabilities – when the target is appropriately funded with
to reduce capital charges, and to allow carriers to focus investment assets to pay future claims – and to generate
more of their resources on writing new business (especially float investment income in the meantime. These types of
in a hardening market), has become more attractive as part transactions continue to require rigorous bankruptcy law
of an overall capital management strategy. In addition, analysis, as sellers strive to reach legal finality for these
several new entrants to the run-off market have emerged long-tail liabilities.
in the last few years, and the number of run-off and legacy
specialist firms backed by private equity have increased as D. Deals Involving Brokers, Agents and Other
well. The private equity participants in the run-off market Intermediaries
have brought heightened attention to investment returns
and alternative investments. The year 2022 saw the continuation of significant consolidation
among U.S. insurance intermediaries. While many of these
In the United States at least, where a definitive Part VII-style deals are quite small in dollar terms, several buyers made
legal transfer of liabilities still remains relatively elusive multiple deals as part of continuing roll-up strategies, with
in market terms, this has meant increased negotiation the majority backed by private equity. According to data from
around the collateral posted, as well as new and unique
OPTIS Partners, private equity-backed/hybrid acquirers were
collateral mechanisms. Legislative changes in Oklahoma
responsible for 78% of all announced transactions in the first
and a handful of other states relating to insurance business
three quarters of 2022 by deal volume, with Acrisure leading all
transfers and to corporate divisions have not yet resulted
in a sea change in how run-off transactions are structured. buyers with eighty transactions during such period.
The reinsurance broking sector has been through a significant
Enhanced asset strategies, as well as U.S. retrospective
accounting rules, have increased the use of funds withheld period of dislocation in recent years, following Marsh
and multiple layers of collateral within run-off transactions. McLennan’s acquisition of JLT (resulting in the biggest three
Where reinsurance trusts are used, we have seen more reinsurance brokers holding materially in excess of an 80%
sophisticated collateral mechanisms to permit greater share of the brokered market). This market was shaken up
diversity in alternative investments. Whether the continued again in June 2022, when Howden agreed to acquire TigerRisk
use and development of Part VII-like legislation, as well (then the fourth-largest reinsurance broker) for $1.6 billion.
as the possibility of corporate divisions, will change the Howden has made no secret of its intention to use the deal as
a springboard to challenge the “big three” brokers and signaled
2022 Insurance Year in Review
7
M&A in the Insurance IndustryII. U.S. Property and Casualty; Brokers and Agents
its willingness to continue pursuing “mega-deals” in the sector Transverse Insurance Group, a fronting carrier platform. The
as it seeks to do that. deal (which closed on January 3, 2023 right before our go-
to-press deadline), marked the first notable acquisition in the
Program managers (often colloquially referred to as MGAs)
P&C fronting sector since Markel’s acquisition of State National
remained attractive targets in 2022, sought by private equity
for $919 million in July 2017. That deal’s eye-catching price
firms, wholesalers, insurers and reinsurers, given the typical
fueled a surge in start-up activity in the fronting sector, with
ability of such companies to demonstrate a high level of
Transverse being one of the two dozen or so new entrants in the
annual revenue retention, consistent growth and margins and
space (almost all of which have been private equity-backed)
low set-up costs. In fact, the year’s biggest intermediary deal
that followed in the wake of the State National acquisition.
was White Mountains’ agreement to sell NSM Insurance
The Transverse deal allows Mitsui Sumitomo optionality to
Group to investment funds affiliated with Carlyle. NSM is a
simply take fronting fees on U.S. program business, retain
leading administrator of specialty insurance program business,
a material amount of the risk on its balance sheet, or even
including for classic automobiles among many other lines. The
provide strategic financial investment in certain select partners
transaction valued NSM at $1.775 billion. White Mountains
as an added incentive to place business with Transverse rather
purchased its interest in NSM in 2018 (in a deal that valued
than one of its competitors. The deal is also expected to lead
NSM at $388 million), and supported NSM in making six
to an upgrade of Transverse’s A.M. Best financial strength
acquisitions since that time. NSM has undergone several
rating to A+, which would be a further benefit in the fronting
changes of ownership in the last decade, from a private equity
carrier market. It remains to be seen whether the substantial
sponsor, to AIG, back to a private equity sponsor, to White
hardening of certain key segments of the P&C reinsurance
Mountains, and now back to a new private equity-sponsored
market has a knock-on effect on program managers/MGAs
vehicle.
(and by extension fronting carriers), as such businesses work
While insurers look at program managers/MGAs (including to obtain the reinsurance capacity to support their aggressive
many insurtechs) as means to access new markets and growth targets.
develop new products quickly and with minimal commitment
Given the hardening reinsurance market and general market
(in terms of time and resources), program managers have been
conditions, including the effect of higher interest rates on the
historically able to attract high valuation multiples based on
appetite of private equity players, it seems likely that the velocity
their ability to market industry talent, underwriting processes,
of deals involving brokers, agents and other intermediaries will
technology and a consistent and renewing revenue stream
slow and EBITDA multiples will finally plateau or even begin to
(retained policy expirations/renewals) free of material financial
decrease in 2023.
risk, which is borne by carriers and/or reinsurers (depending
on the model of the program manager in question). Notable
transactions in this sector in 2022 also included Aquiline’s
majority investment in Distinguished Programs, one of the
largest independent program managers in the United States.
With the growth of program manager/MGA structures, an
increasing number of P&C “fronting” carrier platforms have
been established which serve as “connectors” in the insurance-
risk-to-reinsurance-capital value chain. In August 2022,
Mitsui Sumitomo Insurance Co. announced its acquisition of
2022 Insurance Year in Review
8
M&A in the Insurance IndustryIII. U.S. - Sidecars In M&A Deals and Other Transactions
As block reinsurance transaction sizes continue to increase
in terms of the magnitude of ceded reserves, reinsurers that
III. U.S. – SIDECARS IN M&A DEALS
establish these vehicles may have a competitive advantage
AND OTHER TRANSACTIONS over those that do not. For this reason, we expect more
life insurers and reinsurers active in the life and annuity
M&A market will form sidecars. From a ceding company’s
We note that a number of the more active private equity- perspective, the use of sidecars is likely a favorable
sponsored life reinsurers, including Apollo/Athene (with development to the extent that it results in better pricing
its ACRA vehicle) and Global Atlantic (Ivy Re), have in and smoother transaction execution, while maintaining
recent years established co-investment sidecar vehicles acceptable counterparty risk.
to facilitate large block acquisitions as well as pension risk
transfer and other trades. In addition, in 2022 MassMutual, As these life sidecars continue to proliferate, we see their
Centerbridge and Brown Brothers Harriman launched effects on a broadening suite of products, impacting not just
Martello Re, a Bermuda-based sidecar with reported M&A and flow life and annuity business, but also pension
initial equity of approximately $1.65 billion, which provides risk transfer, funding agreements and other spread-based
MassMutual and its subsidiaries with reinsurance capacity products. Sidecars, and their secondary transactional
on its current product offerings. These so-called “sidecar” impacts, reflect the changes to the industry being brought
vehicles borrow extensively from the ILS structures that by private equity firms’ continued prioritization of the
have been used for years to provide accordion capital to insurance industry as part of their long-term strategy.
P&C reinsurers, primarily with respect to catastrophe
Outside of the life insurance industry, sidecars remain
risks. The benefit to investors is that they can leverage
important to the property reinsurance and retrocession
the expertise of the reinsurer by co-investing through the
markets, particularly in an increasingly hard property
sidecar. The reinsurer benefits principally by having on-
reinsurance market. We have also seen the casualty side
demand retrocessional capacity as well as the opportunity
of the P&C industry adopting longer tail sidecars, including
to earn fee income.
for diversified whole-account casualty business (RenRe’s
Given the long-term duration of these liabilities, and the recent Fontana Re transaction), the run-off industry
diversity and complexity of the products and transactions (R&Q’s Gibson Re) and, with the recent closing of Ferian Re
these sidecars support, these sidecar investments are (by insurtech Coalition), in the cyber line of business. P&C
increasingly complex and sophisticated. Moreover, the producers, MGAs and program administrators have also
importance of asset returns and float to the strategy of rapidly adopted the use of sidecars, captives and alternative
these vehicles, as well as the fees charged by private equity risk transfer. Often linked with complex fronting insurance
and traditional asset managers, requires asset management arrangements, we have seen increased disaggregation of
expertise as well as enhanced corporate governance in the value chain and heightened specialization as between
contrast to traditional sidecars in the property and casualty producers, licensed carriers, and the capital that supports
industry. In addition, the long-term duration of life and the casualty industry.
annuity business (in contrast to many P&C structures)
requires unique approaches to provide capital markets
investors a clear path to liquidity prior to the expiration of
the underlying liabilities.
2022 Insurance Year in Review
9
M&A in the Insurance IndustryIV. U.S. Insurtech
profitability, rather than prioritizing growth and brand
marketing;
IV. U.S. INSURTECH
a number of venture capital investors and reinsurers
are reeling from investing heavily in insurtechs that
While there have been isolated examples of notable U.S. overpromised and under-delivered and are now more
insurtech transactions in 2022, based on data collated by discerning in their vetting process. Notably, some of the
FT Partners, CB Insights and Coverager, most M&A activity highest-profile insurtechs ceded reinsurers material losses
in the U.S. insurtech sector in the past year has involved for multiple years, until forced to apply more rigorous
struggling insurtech entities taking exits at low valuations, underwriting standards in 2022, which has led to increased
typically after capital fundraising failed to materialize. scrutiny of insurtechs as a whole by certain reinsurers;
On its face, this marks a remarkable shift in fortunes for
insurtechs and investors’ transactional and deal activity
the hard reinsurance market has caused reinsurers to re-
in late 2020 through 2021, which saw enthusiasm in the examine the best places to allocate their capital, which in
sector leading to near exponential growth in fundraising turn has led, in certain notable examples, to a move away
volumes. However, beneath the gloomy statistics, those from reinsuring insurtech carrier and program manager
insurtechs that have appropriately tailored their operations business or, at least, a reduction in reinsurance assumed;
to take advantage of change in the insurance market cycle and
have been able to raise impressive funding amounts on insurtech entities are heavily concentrated in the property
reasonable terms and remain attractive acquisition targets.
and casualty space, with a number of the largest insurtechs
being focused on the homeowners and personal auto
A. A Tide Going Out
space. Those sectors have been particularly susceptible
Some key market context: to economic inflation and social inflation and thus have
been faced with some of the hardest parts of the current
after a record-breaking 2021, the U.S. IPO market took a reinsurance market.
sharp turn in the opposite direction in 2022. Throughout
2022, U.S. IPO activity was affected by increased market Those insurtechs whose funding cycles are (or were)
volatility and other unfavorable market conditions, with such that they did not have sufficient time to undertake
private insurtech investors concerned by the dismal the necessary realignment or otherwise ride out these
performance of the big name insurtechs listed in late 2020 headwinds have been faced with “down rounds” of funding
and 2021. For example, at the time of writing, the shares or a collapsed funding round altogether, leading to hasty
of Root, Hippo and Lemonade are down 99%, 96% and and distressed exits through M&A transactions simply in
81% respectively since their listing. While there are global order to “keep the lights on” and stave off bankruptcy.
and market-wide reasons for the decrease in IPO activity,
Distressed insurtech M&A transactions are characterized
the failures of the public insurtechs, which were almost all
by difficult deal dynamics and require a careful and sensitive
direct mass-market model businesses, were attributable
approach to negotiating definitive documents. Most
to a consistent factor: the market’s perception that they
notably, typical insurtech equity waterfall arrangements
were overvalued given their relatively weak underwriting
and venture debt financing arrangements are premised
performance and high cost base. This has led to a significant
on beneficial exit terms and high valuations – in line with
reorientation of valuation methodologies for private
past high-value funding rounds – and it is likely that a
insurtechs, with funders of similar insurtech businesses
distressed M&A exit will leave many “out of the money”
now primarily focused on quality of underwriting and
or facing substantial “haircuts” on sums owed. Among
2022 Insurance Year in Review
10
M&A in the Insurance IndustryIV. U.S. Insurtech
other things, a buyer of such a target will need to price into B. Collecting Shells
any acquisition (a) the cost of retaining key management
and employees who may well be disheartened by their One sign that new insurtech players are still entering the
employee stock plans potentially proving to be worthless; market is the high demand for the acquisition of dormant
and (b) the litigation and other risks associated with the insurance companies as “clean shells” – being the principal
relevant insurtech board (or equivalent) selling the entity way for insurtech buyers to bring new products to market or
at a low valuation. In this respect, a buyer would ideally be enter new jurisdictions and for fronting carriers to expand
looking to obtain the consent of all sellers rather than rely their offerings to insurtechs. By having its own carrier, an
on drag rights, even if such rights are superficially robust in insurtech can capture more revenue and control the entire
the applicable organizational documents. underwriting process. Clean shells now typically sell for
total consideration that includes statutory surplus at closing
Given the headwinds described above, we would expect plus an agreed-upon amount for each of the target’s active
there to be some insurtech M&A transactions in 2023 with licenses. In today’s market, sellers are now routinely able
values in excess of $200 million, involving some of those to attract valuations of $150,000 to $200,000 per license
insurtechs that were previously “unicorns,” i.e., start-ups held.
with post-money valuations in excess of $1 billion based
on their last funding rounds These targets will likely be Examples of U.S. insurtechs or others acquiring shells in 2022
companies that were once eyeing splashy public listings include: (i) the acquisition by Coalition, the cybersecurity
but are now mulling mergers with other insurtechs or other insurtech, of Digital Affect Insurance Company from
exits to avoid “down rounds” or otherwise running out of Munich Re Digital Partners US; and (ii) the acquisition by
funding runway. The majority of such insurtech businesses ManyPets, the pet insurance insurtech, of Digital Edge
have shed between 10% and 25% of their workforce over Insurance Company, also from Munich Re Digital Partners
2022 as they look to reduce their “burn rate” as the chance US. In addition, in January 2022, Tesla Insurance purchased
of a big-ticket IPO exit disappears in the rearview mirror. It Balboa Insurance Co. from Bank of America Corp. and
is also possible that certain of the publicly listed insurtechs has since been using that carrier as an underwriter of its
become acquisition targets themselves, in the same innovative connected car personal auto product.
way that Metromile, a personal auto insurtech (which
went public via a special purpose acquisition company in C. Looking Forward
February of 2021, with a valuation of over $1 billion) was
acquired by Lemonade for approximately $145 million in Despite the high-profile market pricing correction for the
Lemonade stock in July 2022. At the time the deal was big-name insurtechs from the dizzying funding rounds of
announced, in November 2021, the all-Lemonade stock deal 2020 and 2021, there is no denying the impact that insurtech
consideration was valued in excess of $500 million but the innovation has had on the insurance market in the last five
subsequent collapse in the value of Lemonade stock meant years. Insurance is now often found, priced, underwritten
that Metromile shareholders ended up receiving $145 and handled in an entirely digital way and carriers have
million worth of Lemonade shares for a business with over come to recognize that embracing innovation leads to
$155 million in cash, over $110 million in premiums, and an growth, improved loss ratios and decreased expense ratios.
insurance carrier licensed in 49 states (albeit Metromile’s
Some of the most notable insurtech M&A transactions in
cash on hand had fallen by almost $100 million between
2022 have paired targets focused on data, analytics and
sign and close, demonstrating the profitability issues with
systems with buyers seeking an insurance technology
the business).
edge. For example, in January 2022, American Financial
Group announced the acquisition of Verikai, Inc., a machine
learning and artificial intelligence company that utilizes
2022 Insurance Year in Review
11
M&A in the Insurance IndustryIV. U.S. Insurtech
a predictive risk tool for assessing insurance risk, for
approximately $120 million. We would expect that trend
to continue as insurance carriers, intermediaries, and other
insurance industry participants continue to recognize the
need for digitization, modernization, development of new
channels, cost reduction, and new business development.
Looking further ahead: an impressive list of insurtech
companies raised large equity funding rounds in the latter
part of 2020 as investors (including a large number of
strategic insurance companies) waded back into the
insurtech investment waters. It remains the case that
insurers and other market participants will be on the lookout
for ways to collect more and better data, to analyze and
apply that data effectively and to access new distribution
and marketing avenues. These are all things that the best
insurtechs do well, and as these companies grow and
improve they become ever more attractive acquisition
targets.
2022 Insurance Year in Review
12
M&A in the Insurance IndustryV. U.S. M&A-Related Insurance Regulatory Developments
company acquisition (“Form A”) transactions involving
private equity buyers. The NAIC is developing an
V. U.S. M&A-RELATED INSURANCE
electronic Form A database to streamline Form A filings,
REGULATORY DEVELOPMENTS and, as a practical matter, we are already seeing much
greater coordination among states in reviewing private
equity Form A transactions. The NAIC recently asked
M&A-related insurance regulatory developments in 2022 regulators to share their “best practices” for such review,
were keenly focused on matters related to private equity and we expect that regulators with more experience
ownership of insurers and related affiliated transactions. In reviewing Form A filings for private equity ownership (e.g.,
recent months, at the request of the industry, the National Iowa, New York) will develop and share their practices
Association of Insurance Commissioners (“NAIC”) has also with regulators not as familiar.
focused on current statutory accounting guidance requiring
the nonadmittance of negative interest maintenance
Regulators are focusing on indicia of control outside of
reserve in a rising interest rate environment. Investments the 10% of voting securities presumption of control.
of insurers – including with respect to the terms of These factors include economic ownership, shareholder
investment management agreements (“IMAs”), disclosure rights, board representation, loan arrangements and
requirements, investments in complex structured other contractual arrangements such as IMAs. The
securities, and what investments should constitute bonds NAIC’s Group Solvency Issues (E) Working Group plans
– have remained a continued focus at the NAIC. The NAIC to brainstorm how to train regulators and share best
also continued in 2022 to evaluate the development of practices in this area, with a goal of reaching consensus
guardrails for insurance company division and insurance around when “control” of an insurer may be found aside
business transfer transactions. from the bright line of 10% ownership of voting securities.
The NAIC is likely taking its lead from the New York State
A. NAIC Considerations Related to Private Equity Department of Financial Services, which in April 2022
Ownership of Insurers issued a Circular Letter to New York-domiciled insurers
cautioning that a determination of “control” (and resulting
In August 2022, the NAIC adopted a document outlining requirement to obtain pre-acquisition approval) depends
13 “Regulatory Considerations Applicable (But Not on “all the facts and circumstances,” and the presumption
Exclusive) to Private Equity (PE) Owned Insurers” (the of control at 10% or more of an insurer’s voting securities
“Considerations”), and a work plan to address each, on does not “create a safe harbor for acquisitions below the
which we reported here. The NAIC’s Macroprudential 10% threshold.”
(E) Working Group coordinates the NAIC’s workstreams
related to the Considerations, which generally pertain to
IMAs in the context of private equity ownership of
state insurance regulators’ ability to effectively monitor the insurers continue as a focus for regulators. The NAIC’s
solvency of insurers and assess risks faced by the insurers’ Risk-Focused Surveillance (E) Working Group expects to
holding company systems under private equity ownership. share proposed revisions to the NAIC’s Financial Analysis
Key areas of focus in 2022 related to the Considerations Handbook and Financial Condition Examiners Handbook
involved the following areas: regarding affiliated service agreements in early 2023,
and we expect that areas of focus may include fees,
Regulators want to understand the potential risks posed to termination provisions, indemnification and the extent
insurance holding companies by private equity ownership to which an investment manager controls an insurer’s
and have highlighted as part of the NAIC’s work this year investment decisions.
the need for enhanced training and increased uniformity
for state insurance regulators reviewing insurance
2022 Insurance Year in Review
13
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