Historically low interest rates will mean more mergers and acquisitions in the insurance industry — as soon as details around deal-making during a pandemic can be ironed out, according to a report from Cerulli Associates.
Underwriting and investment performance are a constant challenge for insurers, and some will likely seek private-equity partnerships that could benefit the management of their general accounts, the report noted. More than 70% of the $6.7 trillion in U.S. insurance company assets as of the end of 2019 were invested in long-term bonds, according to Cerulli.
Last year, the amount of M&A in the insurance world dipped from a high level in 2018. That will likely change, and one early sign of things to come is KKR’s recent deal to acquire Global Atlantic’s outstanding shares, said Bob Nelson, associate director at Cerulli. That deal, announced in early July, will result in Global Atlantic continuing to operate as a separate business, that firm said in its announcement.
“The interest rate environment is as big a challenge as it’s ever been,” Nelson said. “It probably is a catalyst for more M&A activity, rather than less.”
The COVID-19 era also presents challenges, however, he said.
“It’s difficult for the due diligence to get done. It’s difficult for folks to meet in person,” he said. But the recent KKR deal with Global Atlantic shows that “there are workarounds, ways that people are finding to get deals done,” he said.
Nearly 90% of insurance companies Cerulli surveyed pointed to the ability to get decent returns amid low interest rates as very concerning, making it the top worry they cited. By comparison, 38% said the late stage of the credit cycle was very concerning, and 31% said the same about market volatility.
Sixty-four percent of insurers said they plan to increase their allocations this year to private fixed income. And alternatives, private fixed income and private equity were the top categories insurers said they would be most likely to outsource, according to Cerulli.
By having a PE partner, insurers can get cheaper access to alternative investments, and in effect an affiliated PE manager for their general accounts, Nelson said in an announcement of the report. That can give potentially greater ability to see returns to meet liabilities.
And in return, PE firms get valuable “permanent capital,” he said.
Life insurance and annuity providers will likely be targets for acquisition, given the amount of long-term fixed income in their portfolios, he noted.
"When you look generally at the life and annuity space, the challenges that insurers are up against are pretty well-defined, and they have been for quite some time," he said. "I think there was an expectation that interest rates would follow a cyclical pattern ... [But] we find ourselves in the midst of another crisis, and interest rates have bottomed out to another historic low."
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