lu_inside12-full

Inside magazine issue 12 | Part 03 - From a corporate perspective
Incentives for the PE involvement
in the insurance M&A activity
From the point of view of a PE firm,
the long duration of the technical
provisions inherent in life insurance
business is a funding vehicle that
allows them to enter into long-term
investments with higher yield rates
that are more illiquid than those
offered by other investments.
On the other hand, the attractiveness
of non-life (re)insurance business for
PE investors is due to the
diversification benefits that the
investment might offer to its asset’s
portfolio. This is the case of the
recent acquisition of Partner Re made
by Exor for USD 6.9bn. According to
the Financial Times , the Italian
investment company (which owns a
large share of Fiat Chrysler
Automobiles, Ferrari and CNH) was
determined to buy the reinsurer to
diversify its industrial investments.
PE firms established in places with
higher interest rates where funding is
expensive have shown greater
interest in insurance undertakings
based in the United States and
Europe, in order to have access to the
low interest rate funding and use it in
overseas investment strategies.
Nevertheless regulatory pressure on
solvency capital requirements
through the implementation of
Solvency II is generating uncertainty
for M&A and might hold some
potential deals. Similarly, in the
broker and agency’s M&A arena,
regulation might also undermine the
involvement of PE actors interested
in these deals due to the ease of
access to the market and the
underlying cash flows.
Finally, it is important to notice
that insurance regulators can be
quite reluctant to authorize this
type of deal.
The latest techniques to optimize capital
allocation involve maximization of the RoE
and the RORAC. Allocating the capital to
business units allows managers to estimate
the amount of risk borne by each business
unit and how expensive each business unit
is in terms of capital. The technique focuses
on finding the optimal set of business units
(business lines, insurance products, or any
other risk segmentation) and on how to
allocate the invested capital within the units
so that it maximizes the RoE and/or the
RORAC.
The optimization of capital allocation in
today’s macroeconomic conditions and low
interest rate environment enhances profit
and provides a clear view of the underlying
risk within the insurance undertaking.
Conclusion
The low interest rate environment,
combined with the increased regulatory
burden, will require a review of the
technical leverage and strategic approach.
The complexity of such a review is due
to the interaction between the different
variables that are intertwined in the
objective of enhancing profits.
These are:
Sources:
EIOPA Financial Stability Report
https://eiopa.europa.eu/Publications/Reports/
Financial_Stability_Report_December_2015.pdf
Swiss Re, sigma study
M & A in insurance: start of a new wave?
http://www.swissre.com/sigma/
CAA
http://www.commassu.lu/upload/files/482/
rapport%20annuel%202014%20-%20annexe.pdf
ACPR
https://acpr.banque-france.fr/fileadmin/user_upload/
acp/publications/rapports-annuels/20151007_
Rapport_chiffre_2014_Assurances.pdf
Dutch Association of Insurers
https://www.verzekeraars.nl/verzekeringsbranche/
cijfers/Documents/VerzekerdVanCijfers/2014/
Verzekerd%20van%20Cijfers%202014%20(EN).pdf
BNB
https://www.nbb.be/doc/cp/fr/vo/stat/pdf/ii_12-2014.
xlsx
Finance Asia
http://www.financeasia.com/News/394314,fosuntargets-deals-in-japan-and-europe.aspx
Insurance News
http://insuranceasianews.com/topics/legalregulatory/chinas-fosun-completes-acquisition-ofmeadowbrook-insurance/
Financial Times
http://www.ft.com/fastft/2015/05/04/fosunironshore-deal/
http://www.ft.com/intl/cms/s/0/934a6be8-39d0-
11e5-bbd1-b37bc06f590c.html#axzz41gfzWoRZ
Wall Street Journal
http://www.wsj.com/articles/ace-agrees-to-buy-rivalinsurer-chubb-1435748869
European Central Bank euro area yield curve
https://www.ecb.europa.eu/stats/money/yc/html/
index.en.html
••
The capital requirements established
by the regulation
••
The desired amount of capital to be
invested according to the shareholders’
strategy and expected return (expected
RoE and RORAC)
••
The capital needed to fully support the
underlying risk of the undertaking
••
The leverage needed to promote the
growth of the policyholder base
••
The various options for allocating this
capital to enhance growth.
Based on a review of the technical
leverage, the most profitable option for
the undertaking may be to transfer a
portfolio, consider the BPO of a business
unit or proceed to a full M&A.
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