Life Insurance
To Buy or to Sell?

• Terrence Dopp
• November 2020
• 

Key Points

• Issue: Economic conditions, somewhat better than the dour projections of March and April, leave some companies looking to sell and others in buying mode.
• Conditions: Insurers expect low interest rates to continue and the economy to be choppy, prompting a rush for scale.
• On the Ground: Recent players to announce sizable transactions include MetLife, MassMutual and private equity firm KKR & Co.

In the back halls of the life insurance and annuities world, mergers and acquisitions chugged along at the same rate as before the COVID-19 pandemic through June, in a 2020 that was marked by uncertainty.

Joblessness rose in the first half of the year and lockdowns to stanch the spread of the novel coronavirus brought economic activity to a crawl for months. Yet in the insurance industry, the urge to buy and sell companies in the hopes of paying a growth premium or losing an unprofitable operation never completely stopped.

In fact, many of the transactions were big. Very big.

Private equity firm KKR &Co. in July said it agreed to buy retirement and life insurance company Global Atlantic Financial Group Ltd. in what could be a deal north of $4 billion. In another noteworthy transaction announced in early September, Empower Retirement will acquire the retirement plan business of Massachusetts Mutual Life Insurance Co. in a deal valued at $2.35 billion.

And MetLife, the largest U.S. life insurer, also announced in September that it agreed to acquire Versant Health from an investor group for $1.68 billion in an all-cash transaction.

Nick Komissarov, director, North American Life M&A leader at Willis Towers Watson, said initial expectations called for a drop in activity in life insurance mergers and acquisitions, followed by some degree of return to normal levels. He cited the deal that saw a unit of Athene Holding Ltd. invest $500 million in Prudential plc's U.S. life insurance businesses, Jackson National Life Insurance Co., in addition to the KKR/Global Atlantic and Empower/Mass Mutual transactions.

In July, Willis said the impact of COVID-19 on deal-making among North American businesses in the first half of the year was “significant but not unexpected” as companies dealt with the economic slowdown caused by the pandemic. During the span, there were seven insurance transactions, mirroring the same period in 2019.

“The pick-up in activity was actually faster than what we imagined,” he said. “All of these deals were quite large and quite complex. The pandemic did not stop these deals from getting signed.”

He said the firm also noticed that deals announced pre-lockdown went ahead as planned. He cited the closing of a transaction that saw Carlyle Group and T&D Holdings complete their acquisition of a 76.6% stake in American International Group's legacy reinsurer Fortitude Group Holdings for $2.2 billion as a prime example.

During the turmoil in markets that took a toll on balance sheets toward the end of March some life insurers lost as much as 50% of their market value but saw a quick recovery, according to Komissarov. A persistent low interest rate environment also means carriers need to allocate resources toward existing in-force blocks of business, and divestiture of some business becomes a good option to do that.

“And some companies are just executing on plans they had before the pandemic,” Komissarov said. “The technological advances, the fact that we could all work remotely relatively efficiently just meant the deal flow could continue.”

Visioning Growth

The pandemic was more than an inconvenience as U.S. gross domestic product dropped 31.7% in the second quarter and the forced social distancing and shuttering of economic activity it caused sent the jobless ranks rising. Yet underlying that grim statistic was also another factor the Bureau of Economic Analysis reported for the quarter: U.S. nonfinancial corporations saw a drop in profits totaling $170.1 billion in the second quarter, but the picture for domestic financial corporations was far rosier with an increase of $39.5 billion during the same time span.

In the case of MetLife, Chief Executive Michel Khalaf said the Versant acquisition will propel the company to become the third-largest player in the group vision area. He said it adds to other recent markets the company entered such as health savings accounts, estate planning and pet insurance.

Announcing the deal in September, Khalaf said the company is also resuming share repurchases after pausing earlier in the pandemic and expects to spend the remaining $480 million set aside to do so before the end of this year. MetLife ended the second quarter with $6.6 billion in cash and liquid assets.

“We carefully weigh every use of capital against the alternatives,” he said. “Our goal is to achieve the right balance between investing in growth and returning capital to create long-term shareholder value.”

The transaction will give MetLife access to Versant's 35 million members, and in return MetLife's customers will gain access to Versant's “extensive” provider network. The U.S. vision care market has a 5% annual growth rate and favorable demographic trends, MetLife said.

Earlier in the summer, Khalaf said the company was “open for business” if a suitable merger or acquisition presented itself during the year.

And it wasn't alone in its deal hunting.

Dan Houston, chairman, president and chief executive of Iowa-based Principal Financial Group, said in August the company was “eyeing capital deployment” later in the year with M&A as one potential move after it avoided COVID-19 related impacts to the hardest hit industries.

Any M&A deal needs both a buyer and seller. Some are finding the time is right to shed some operations in an effort to focus on their core business.

The agreement between MassMutual and Empower is expected to close in the fourth quarter. It will mean Empower has a participant base of 12.2 million and $834 billion in assets across about 67,000 workplace savings plans. Roger Crandall, MassMutual's chairman, president and chief executive, said the deal will strengthen its position in the U.S. protection and accumulation industry by expanding wealth management and distribution; investing in asset management, insurance and institutional businesses; and improving the digital experience.

“It made strategic sense to find a company that would be a better long-term home for our retirement plan business. Now more than ever, retirement services providers must have greater scale and make significant and sustained investments to meet future competitive and evolving customer needs,” Chelsea Haraty, a MassMutual spokesperson, said in an email. “Additionally, increasing fee compression spurred by historically low interest rates and an unwavering drive for efficiency are leading to ongoing industry consolidation where a smaller number of players have emerged as leading the market.”

In a comment on the deal, AM Best said it's expected to reduce MassMutual's exposure to equity and interest rate risk and free up a moderate amount of statutory capital meant to grow its core business. “AM Best expects the transaction to be moderately negative to earnings in the near term until MassMutual can successfully deploy the proceeds through organic or non-organic growth opportunities and divest itself of stranded costs,” the note said.

In another example of current market appetite, American Equity Investment Life Holding Co. confirmed in early October that it had received an unsolicited and non-binding proposal from Athene Holding Ltd. and Massachusetts Mutual Life Insurance Co. to acquire all of its outstanding common shares for $36 apiece in cash, or more than $3 billion. The company said it was reviewing the proposal and hadn't accepted.

Bird of Another Feather

In December of 2019, consultancy Deloitte released its annual outlook for the coming year on M&A activity across the insurance industry, predicting such deals would remain at about the same pace as the prior 12 months. By midyear, it had released an update counting economic, interest rate, and financial market uncertainty, as well as a hot-button presidential election, among “headwinds” that could dampen activity.

The report said the pandemic is leading insurers in the life/health and life/annuities sectors to update economic scenarios, as well as plan for continued low interest rates. A company survey of insurance executives found about half expect to be involved in M&A transactions within two years.

“The aforementioned factors may force insurance carriers to make strategic choices in terms of evaluating their core offerings and disposing of noncore operations,” Deloitte said. “Disruption tends to create M&A opportunities, and we expect that to be the case in the second half of 2020 and in 2021.”

Mark Purowitz, a consulting principal who leads Insurance Mergers &Acquisitions at Deloitte, said the industry is in “respond, recover and thrive” mode.

Early 2020 was dominated by the waiting and the first responses to the crisis. As the year dragged on, he said companies began looking at recovery time frames that were much faster than anticipated, and as a result went looking for ways to thrive.

The pandemic also took less of a bite out of balance sheets than the industry saw during the 2008 financial crisis, he said.

Purowitz argues that traditional buy-side/sell-side views of insurance M&As fail to capture precisely what's occurring at the moment.

Rather, he said other transactions such as investments in maturing insurtechs and the forging of strategic partnerships between players in the insurance space ought to be viewed through the same lens. All involve using capital in an inorganic fashion to make money, he said.

“You're evaluating very, very similar things to solve business problems whether you are disposing of an asset or buying an asset as you would in situations where you are considering the creation of new ecosystems and alliances,” Purowitz said. “The pandemic, while it initially put a hold on deal-making in general, has actually accelerated the opportunities in the marketplace.”