How reinsurance adds value to insurance M&A deals
In this Q&A, Sean Kim, Head of M&A Solutions at Munich Re Life US, takes a closer look at the dynamic landscape of the life and annuity mergers and acquisitions (M&A) market. Sean discusses how reinsurance plays a pivotal role, offering the expertise, capital, and creative solutions that drive successful outcomes for our clients.
Q: What trends are you seeing in the life and annuity M&A market?
We saw a peak in deal activity in 2021, and since then it has slowed considerably, mainly due to economic uncertainty that’s giving buyers and sellers pause. The rising interest rate environment and volatile equity markets have also made it more expensive to finance these deals. There's increased regulatory scrutiny as well, which means even more care and diligence need to be put into how deals are packaged on both sides of the table.
With that said, we still see a lot of appetite for these blocks and more market entrants, particularly asset management and private equity firms that are attracted to the potential investment yield and recurring revenue this form of ‘permanent capital’ provides. Several large deals were announced in the first half of this year, and we expect more in the coming months. More entrants into the market means more competition, and both sellers and buyers will need to make their packages and offers as appealing as possible to be successful in this space.
Q: Why is Munich Re focused on this market, and why now?
There’s a high demand for these blocks, especially from asset management and PE firms, which can be very complementary partners to a reinsurer like us.
We've also seen a transition from acquisitions of straight annuity blocks to life blocks. This is where much of our expertise lies in the U.S., and we are uniquely positioned to look across the market and generate insights that others might not. For example, our ability to underwrite and assess biometric risk gives us an opportunity to participate in deals as partners to buyers who have limited or no interest in this type of risk.
We can also leverage our strong balance sheet, significant capital base, and fundamental understanding of the capital management needs of insurance companies to provide solutions to optimize deal value. And finally, as a reinsurer, we’re obviously very committed to the sustainable and healthy growth of our industry. Leveraging our areas of expertise to support these deals is one way to ensure that the market stays dynamic and continues to thrive.
Q: What services does Munich Re offer for M&A transactions?
Since 2016, we've actually closed over 35 structured financing transactions across more than 20 states, including reinsurance support for three large M&A deals. We understand that each deal is unique, and we approach it as such by creating bespoke structures that may contain various components of both financial reinsurance and traditional reinsurance.
It’s really a wide range of solutions – all designed to optimize deal value. We can provide risk assessment expertise, capacity, liquidity, and volatility management solutions, as well as financing solutions for surplus and/or capital relief. Our size and depth of expertise mean we can put in a big cross-functional team effort on these kinds of deals.
Q: How does Munich Re add value to M&A deals?
I like to think of us as a one-stop shop partner that ultimately aims to increase the value of the block or entity being bought or sold. For example, if certain blocks are non-core to a buyer, we could reinsure those by traditional risk transfer solutions while providing cash flow certainty by potentially guaranteeing rates as well. This can be very valuable to certain buyers as it can help with their investment and reinvestment strategy.
We're able to do these things largely because of our ability to leverage and analyze unique data sources to help companies project experience and assess risk at a more granular level with a higher degree of confidence. Additionally, our financial strength and stability mean we may be able to help finance part of the purchase price through structured solutions, which can be particularly useful in our current economic environment, where buyers may be hesitant to liquidate their assets.
The bottom line is that no matter the size or complexity of the opportunity, we have the scale, market-leading capacity, and technical know-how to execute with speed.
Q: So, what can we expect going into next year?
Although activity has decreased in the past year or so, there's still a very healthy pipeline of deals, which I expect to continue for a few years and perhaps beyond that.
As the market gets more competitive and the availability of annuity blocks shrinks, it is likely we'll continue to see more life blocks up for sale. Companies may even get more creative and expand into new asset-intensive lines of business. This should help keep a steady deal stream for the foreseeable future. And it’s perfect for us, too, since we really like working with our clients to come up with the flexible structures that get deals done.