Private equity fuels insurance activity despite ‘weak’ deal market – Insurance News

According to the PwC 2024 Midyear Outlook Report, growing interest from private investors is expected to maintain stable activity in the insurance transaction market at a time when other sectors are not recording comparable volumes.

Private equity involvement in insurance books through acquisitions, reinsurance and sidecars in the life and annuity sectors in particular has been on the rise. In property and casualty, private equity is the largest investor in the brokerage space.

“Broadly speaking, from a macro perspective, the deal markets in 2023 and 2024 are going to be unimpressive at best compared to what we’ve seen in the past few years,” Mark Friedman, insurance deal leader at PwC US, told InsuranceNewsNet.

“That said, we are actually seeing more transaction activity in the life insurance and annuity space than ever before. Transactions are coming in all shapes and forms.”

More capital in insurance

From mid-November 2023 to April 2024, 145 insurance deals were announced valued at more than $34 billion. This is a decrease in volume compared to the previous period, when 318 deals were announced, but an increase in value compared to $11.2 billion in the previous period.

The largest brokerage mega-transactions announced during this period include:

Aon plc’s acquisition of NFP Corp.: $13.6 billion
Arch Insurance North America’s acquisition of Allianz’s U.S. MidCorp and Entertainment insurance business: $1.4 billion

While uncertainty over interest rates could impact the insurance brokerage market, Friedman said insurance transactions remain “as active as ever.”

“We see relatively more capital being invested in the insurance sector, especially in insurance brokerage, than in some other sectors that have struggled to grow,” he said.

Trends in the sector

PwC noted that the lower number of transactions in the property and casualty insurance market may have been influenced by regulatory changes introduced by the Bermuda Monetary Authority.

At the same time, however, Friedman indicated that dealmaking in the sector had shifted away from large acquisitions and toward reinsurance gains that are not captured in the data. Instead, he described it as a “beneficiary” of the current market environment, as well as other factors.

“In addition, over the last decade, there has been growing interest from private capital in leveraging the lower cost of capital that insurance companies have and managing the assets of insurance companies, and that has come in various shapes and forms,” he said.

He explained that this trend is driving many private equity wealth management firms to create their own insurance platforms and solution groups.

“So demand far outstrips supply, and as a result we’re seeing increased activity and valuation increases in the life and annuity segment.”

Meanwhile, the property and casualty insurance sector posted record profits, likely helped by falling inflation, higher interest rates and higher investment returns.

Friedman noted that P&C companies raised rates between 2022 and 2023 to account for replacement costs. But now that inflation has fallen, they are taking advantage of the higher rates that are still in effect.

“It was a very profitable time,” he said.

Private capital involvement

Interest from private capital is expected to continue to grow, which is likely to drive activity in the insurance sector.

“There is a lot of free cash and committed capital in the private equity sector, and the insurance brokerage business is in high demand because of the stable profits,” Friedman noted.

He added that in the case of P&C, while there are independent private and public companies, most of the M&A activity comes from private equity investors.

According to him, L&A believes that the ongoing shift towards private capital involvement, particularly in relation to asset management, could translate into a different profile of guarantees being offered to the market.

“There is a lot of interest and we are seeing continued renewed interest from asset managers who are not yet in this space. There are still new entrants, as well as those who are in the space and want to grow their portfolios to achieve real scale.”

He added that the shift is not just an “optimization game,” but also a question of whether traditional insurance companies will be able to compete in tomorrow’s market in the spread business, such as fixed annuities, without the asset management capabilities of their competitors.

Interest in the Asian market

Friedman also noted that investment interest from Asian markets is growing. Regulatory changes are putting a strain on capital, particularly for some Japanese insurance companies, and prompting them to seek financial reinsurance through some of the same private equity-backed platforms that provide solutions for the U.S.

“Private equity asset managers are looking to aggregate assets on a large scale, and there is a significant amount of forced business in Japan,” Friedman said.

Rayne Morgan is a content marketing manager at PolicyAdvisor.com and a freelance journalist and copywriter.