‘Battered’ US insurers increasingly attracted to PE-driven M&A

Written by Adam Cadle

21/09/2020

US insurers are becoming increasingly attracted to private-equity (PE)-driven mergers and acquisitions (M&A), as “the most challenged institutional investors” continue to be “battered” by a return to ultra-low interest rates, a new report has said.

In its latest research, Cerulli said broad economic uncertainty and social distancing may have tempered the pace of M&A deal making, but longer-term dynamics in the industry are likely to drive persistent activity.

US insurance companies are among the largest investors in the world - assets increased by 6.7% in 2019 to reach a total of $6.7trn, the majority of which is allocated to investment grade long-term bonds.

“The low interest environment leaves very little room for poor underwriting or asset management performance—it’s a rising threat to insurers’ business models,” Robert Nelson, associate director at Cerulli stated. According to the research, 88% of insurers cite low interest rates/generating returns or yield at the top of their list of concerns.

Seeking to match asset returns with underwritten liabilities and position their business for long-term growth, Cerulli said many insurers are looking to partner with PE firms and increasingly depend on higher-yielding asset classes via separate accounts or in a fund structure. “A takeover of general account assets by a PE firm gives the insurer, in effect, an affiliated PE manager and the fee advantages typically seen in co-investing scenarios—a much more cost-effective and efficient way to attain the desired alternatives exposure,” according to Nelson.

Private equity firms’ motivation for pursuing insurance assets is twofold: they gain a reliable return stream on invested capital while also gaining highly coveted permanent capital from the insurer. “Permanent capital is more valuable to PE firms because it’s stickier,” says Nelson. “Stable and positioned for the long term, permanent capital is perfectly fitted for the longer time horizon investments for which private investors are known. It also reduces the need for external fundraising on a cyclical basis.”

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