Corporate and Risk Transactions, Regulation and Tax Developments
I. REVIEW OF M&A ACTIVITY
A. United States and Bermuda
2021 represented another robust year for insurance industry M&A activity, taking in stride the ongoing COVID-19 pandemic, and occurring within the context of a global mergers and acquisitions boom across all industries (with global M&A hitting new highs in 2021 and a significant increase in numbers of deals from 2020). More than 250 life, health and P&C deals were announced in 2021 compared to 230 in 2020. Furthermore, 2021 reflected an uptick in the number of "megadeals" involving United States insurers in the life and health sector.
The largest United States or Bermuda (a deeper discussion of trends in the Bermuda M&A market appears below) deal announced last year was Apollo Global Management's acquisition of the majority stake of Athene Holding Ltd. in a stock-for-stock transaction implying a total equity value of Athene of approximately $11 billion. This deal was notable for a number of reasons including the existing relationship (including Apollo's existing investment management arrangement with the company and its 25% stake in its equity) between Apollo and Athene and as a data point for how financial sponsors may view their investments in insurance companies in comparing their performance to the broader sector (for those that are public).
The largest United States deal announced last year was Allstate's agreement to sell a portion of its life business, Allstate Life Insurance Company, and certain related subsidiaries to The Blackstone Group ($4.00 billion) – the New York business and Allstate Life Insurance Company of New York were separately sold in a smaller transaction to Wilton Re – followed closely by Great-West's acquisition of the full service retirement business of Prudential ($3.55 billion) and MassMutual's acquisition of Great American Life Insurance Company from American Financial Group ($3.5 billion).
We note that in a continuing trend, much of the deal activity in 2021 – particularly in the life and health sector – involved the sales of blocks of businesses effected through reinsurance, which are transactions not always reflected in public M&A databases and listings, for example Talcott Resolution's reinsurance of a significant block of fixed indexed annuity liabilities from Allianz Life (with a portion placed with Resolution Life), or where the "purchase price" in such transaction can be difficult to assess (in comparison to the overall amount of liabilities involved). Though this may make comparisons to prior periods difficult, it is notable that in addition to the transactions described above, there were a number of other United States life and health deals involving purchase prices in excess of $1.0 billion, some of which we discuss below.
i. Life and Health Transactions
While The Blackstone Group's completed $4.00 billion acquisition of Allstate Life Insurance Company and the Talcott Resolution/Allianz Life transaction noted above do continue the trend of financial sponsors acquiring insurers (via M&A transactions or reinsurance) with large fixed annuity and life insurance reserves, and sponsor-backed roll-up vehicles such as Fortitude Reinsurance Company Ltd. continue to acquire United States businesses such as Prudential Annuities Life Assurance Corporation ($1.5 billion), and evidence financial sponsors' willingness to move in and out of assets in the space (for example, The Blackstone Group's acquisition this year follows its sale in 2020 of FGL Holdings to Fidelity National), financial sponsors' involvement in the industry is also evidenced by strategic partnerships with a focus on asset management and asset rebalancing, which can be paired with the acquisition of minority positions. In July, AIG announced a strategic partnership with Blackstone for its life and retirement business that featured entry into a Strategic Asset Management relationship and the sale of certain affordable housing assets to Blackstone Real Estate Income Trust ($5.1 billion) that was significantly larger than the value (in absolute terms) of the 9.9% equity stake Blackstone received in the enterprise ($2.2 billion). For the asset manager, we can presume the transaction provides significant and stable investable assets without the requirement for a significant equity investment or the burdens associated with majority control of an insurer. For AIG, the transaction provides financial flexibility and support for potential separation of its life and retirement business. The ongoing long-term low interest rate environment preceding the recent uptick in rates continued to fuel desires from insurers to exit certain lines of capital-intensive, low-return businesses and provide an opportunity for asset managers and financial sponsors to acquire blocks of business in reinsurance transactions (as well as M&A). Increased competition for such blocks, and legal entities, also contributed to increased competition for insurance "shell companies" among financial sponsors and other parties looking to enter into the industry (either on an active basis or in acquiring runoff blocks of business). The 2021 market for blocks of life and annuity businesses remained robust, though the economic headwinds (increases in interest rates) and long period of activity will bear considering in how long such trends can continue in 2022 and beyond.
As discussed in more detail below in the Regulatory section of our Year in Review, certain subcommittees of the NAIC have recently been focused on matters related to the ownership of insurance companies by private equity firms. This has culminated in the designation of an NAIC committee, the Macroprudential (E) Working Group, to oversee ongoing and future NAIC initiatives related to private equity ownership of insurance companies. While a number of regulatory considerations identified by the NAIC could affect strategic owners as well as private equity owners, certain of the issues under consideration focus on the terms of investment management agreements with affiliated entities, including the amount and types of management fees paid by the insurer, the termination provisions (the difficulty and cost of termination) and the degree of discretion or control of the investment manager over investment guidelines, allocation and decisions. The recent discussions at the NAIC have thus far focused primarily on potentially requiring enhanced disclosures from private equity owners. Private equity buyers can expect increased scrutiny during the Form A process and should be prepared for protracted discussions with regulators and longer lead times that may affect the pre-signing auction process. Conversely, the regulatory focus on private equity may prove advantageous for traditional insurance holding companies participating in the same auctions in order to make strategic investments.
As we have noted in prior years in review, much of the M&A activity in the life insurance industry over the last several years has been driven by private equity sponsors seeking to acquire blocks of fixed annuity and life insurance policies. While not all private equity sponsors have adopted the same investment thesis, the attraction of the life and annuity business for many sponsors has been a consequence of their desire to leverage their investment management expertise with respect to certain asset classes which they perceive as being underallocated compared to other general account assets (e.g., structured credit). In some private equity-sponsored acquisitions of life and annuity companies and blocks of business, the sponsor has sought to condition its obligation to close on the approval of the terms of an investment management agreement between an investment management affiliate of the sponsor and the target which would become effective at the closing.
It is too early to tell whether the NAIC focus on private equity will result in new regulations and whether any such regulations will have merely a disclosure focus or a substantive bite. From a deal-making perspective, however, both buyers and sellers will be increasingly focused on the allocation of closing risk – particularly in deals which implicate some of the Macroprudential Working Group's regulatory considerations such as related-party investment management agreements and who bears the risk of disapproval. As a practical matter, pre-signing conferences with regulators which are already becoming the norm in certain states may become more widely used as parties seek closing certainty. The practical consequence may be that transaction timelines become stretched out as interaction with regulators becomes increasingly front-end loaded.
Strategic M&A in the life sector was also strong, including large-scale transactions such as, in addition to MassMutual and Great-West's activity noted above, CUNA Mutual's acquisition of Assurant's Global Preneed business ($1.35 billion) and Prudential's spinoff of Jackson Financial Inc. ($1.765 billion) and a number of sub-$1 billion transactions. Of interest coming out of 2020, and with an eye towards increased regulatory and antitrust scrutiny in the Biden administration, the previously announced Aon and Willis Towers Watson merger was terminated prior to completion under review by the United States Department of Justice.
ii. Property/Casualty Transactions
Consistent with 2019 and 2020, P&C M&A transactions did not supercharge deal volume in 2021 and, in comparison to 2020, 2021 featured fewer "megadeals" in the sector. We believe that between the relative absence of financial sponsor activity, prior years of historic consolidation and economic factors, the P&C M&A market is less frothy than its life and health counterpart.
Despite the absence of any M&A transactions in the United States involving a purchase price in excess of $1 billion, a number of smaller P&C transactions were effected throughout the year, involving financial sponsors (such as the acquisition of ProSight Global ($586 million)) and strategic acquirers (Progressive's acquisition of Protective Insurance Corporation ($338 million)).
iii. United States Involvement in the International M&A Market
United States involvement in the international M&A market (and international interest in the United States) was noteworthy in 2021. Throughout 2021, some very significant foreign or internationally headquartered insurance groups and firms advanced strategic development opportunities through investment in United States insurance companies. Worthy of particular note are public announcements and M&A activity by Japanese insurers in 2021 which may indicate a new wave of successful United States acquisitions by Japanese companies. Emblematic of this trend is Mitsui Sumitomo Insurance's previous announcement about its intent to deploy significant capital ($4.5 billion) to purchase United States insurance companies, and its subsequent acquisition of United States managing general agency International Transportation and Marine Office in 2021 in line with this stated course of action. Tokio Marine Holdings acquired Reliance Standard Life Insurance Company in 2021, formal approval for which was provided by the New York State Department of Financial Services in early 2022. On the basis of additional public announcements that have been made, it is expected that increased M&A activity from significant Japanese insurance groups will continue in 2022.
However, increased regulatory scrutiny both in the United States and internationally contributed to a slowdown, and in some cases, a breakdown of acquisitions in the United States by certain foreign insurance companies. Chinese insurers were particularly impacted by regulatory hurdles including those related to CFIUS considerations in the United States and the tightening of outbound overseas investments by Chinese regulators. The termination of China Oceanwide Holdings Group Co., Ltd.'s proposed merger with Genworth Financial, Inc. after over four years of work on the matter is of particular note in 2021. Anticipated expanded CFIUS review may interrupt the growth in recent years of Chinese involvement in the United States insurtech market as well.
2021 saw some notable outbound international M&A activity by United States insurance groups. Most significantly, Chubb acquired Cigna's life and non-life insurance companies relating to its personal accident, supplemental health and life insurance business in various Asia-Pacific markets for $5.75 billion. In addition, certain United States-based and global insurance groups increased their stakes in foreign joint ventures, including Chubb's greater presence in China (it became the majority shareholder of Hutai Insurance) and MetLife's expanded footprint in India (through its purchase of an additional significant minority stake in PNB MetLife India Insurance Company).
Large United States brokers contributed a significant portion of international insurance M&A activity in 2021. For example, Arthur J. Gallagher completed its acquisition of Willis Towers Watson's treaty reinsurance brokerage operations in December 2021, resulting in a combined business that spans 31 countries. Notably, this transaction was finalized following the ultimately unsuccessful merger of Aon and Willis that was in progress earlier in the year. Additionally, Marsh increased its stake in Marsh India Insurance Brokers from 49% to 92%. Current trends point to continued activity around insurance brokerage consolidation in 2022, including cross-border M&A, driven in part by a growing presence of private equity-backed buyers.
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Originally published February 2022
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