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| | 2015 Headed For Record Year For Insurance-Related Organization Mergers and Acquisitions
By Lonce LaMon - July 7, 2015
Three mega-insurance-deals have taken place within one week’s time.
At the end of last week, Aetna had the top deal with a $37 billion takeover of Humana in the US health insurance market. A week ago, brokerage Willis Group said it would merge with consultancy Towers Watson in a deal for $18 billion. This week, Ace struck the largest pure insurance takeover in the sector’s history with the acquisition of local US rival Chubb for $28 billion.
Similar to countless other sectors, brightening economic outlooks and ultra-low financing costs are combining to persuade company boards to spend record amounts on deals.
In some ways, the latest takeovers are individually unique. The brokerage deal is an attempt by Willis to narrow the gap with the big two in the sector, Marsh & McLennon and Aon. The Ace-Chubb combination is part efficiency-seeking, part empire-building. And Aetna’s acquisition is likely to be one of a number in US health insurance, where underwriters are seeking ways to boost negotiating power with ever heftier drugs groups at the same time as new healthcare legislation is incentivising cost savings.
But there’s also a common theme: Across the landscape of insurance dealmaking, the biggest catalyst for Mergers & Acquisitions is a white-hot version of the driver behind much of the market-wide M&A boom: low interest rates.
For insurers, zero rates don’t just mean free financing for buyers, as in any sector. There is an indirect, defensive spur, too. As investors, hungry for yield, have flocked into the underwriting market with alternative sources of capital, the added competition has driven down prices, in some areas to uneconomic levels. A merger is a natural response. Done right, it should both strip out capacity and generate cost savings. Even in the broking segment of the market, low interest rates are playing their part. In their search for decent returns to match their commitments, pension fund clients are increasingly turning to the likes of consultancy Towers Watson for advice.
The last time there was this intensity of deals, it did not end well. About 15 years ago, Hank Greenberg, the legendary boss of AIG, was buying up the likes of American General for $23 billion and SunAmerica for $18 billion. It was not long before this large group, circa 2008, had become the trainwreak of the financial crisis.
Last week’s Chubb takeover, driven by Ace boss Evan Greenberg, did not pass the sniff-test of family rivalry and a desire to build an even larger business than his father did at AIG. However, the dealmaking seems pretty likely to continue. Even if interest rates start to rise, upward moves are likely to be slow. For many, cost savings through M&A look like the only way to boost returns on equity that often barely exceed 10 per cent.
Opportunities abound. Insurance remains a fragmented sector, particularly in the United States. Mutually owned companies are numerous, keeping pressure on commercially owned underwriters to cut costs to remain competitive.
US deals, despite the complexities of state-by-state insurance regulation, are more likely than takeovers in Europe, where the incoming Solvency II regulations leave little opportunity for merger talks.
The appetite for insurance Mergers &Acquisitions contrasts starkly with the dearth of deals in banking, where regulators are hostile to any combination that would exacerbate the risks of institutions already deemed “too big to fail”. Of course, big, complex insurance companies have themselves been made subject to regulatory penalties — nine insurers ranging from Allianz and Axa to Ping An and MetLife are deemed “systemically important financial institutions”, though the ramifications have yet to be detailed.
For now, though, the fear of bubble valuations is not deterring fans of M&A.
A third danger may be looming from outside the insurance world. As those deals were being struck last week, the Financial Times held its Future of Insurance conference in London. According to a source, few delegates seemed to take seriously enough the advent of new tech-savvy competitors disrupting the old world of insurance. Bulking up through M&A might be one way to thwart upstart competition. But the flipside risk — of being so internally focused that you ignore the fast-evolving market environment — is just as big.
lonce@adjustercom.com; Lonce LaMon, journalist; information extracted from various articles, sources, and Financial Times.
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