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Europe’s life insurers rejuvenate back books with private equity
Europe’s life insurers rejuvenate back books with private equity

Europe’s life insurers rejuvenate back books with private equity


Christelle Ybanez

Christelle Ybanez

Head of Asset Owners Market Strategy

BNP Paribas Securities Services

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Christiane Schmidt

Christiane Schmidt

Strategy & Market Intelligence

BNP Paribas Securities Services

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Private equity groups are emerging as key players in the consolidation of Europe’s insurance industry, as they eye opportunities in life insurers’ back books and insurer-originated assets.

Christiane Schmidt, Senior Analyst, Strategy & Market Intelligence, and Christelle Ybanez, Head of Asset Owners, Continental Europe and of Asset Owners Market Strategy at BNP Paribas Securities Services, discuss this developing M&A trend, and why service providers specialised in insurance servicing are essential to private equity players’ success.

Why are private equity players circling Europe’s insurance run-off market?

Christiane Schmidt: Over the last few years, and especially during 2018, we have seen an acceleration of deals in Europe by private equity-sponsored insurance consolidation platforms, notably in the life insurance sector.

Major private equity players such as Apollo Global Management, Blackstone Group and KKR & Co Inc. have already been active acquirers in the US market. Acquisitions have focused on books of variable annuities, 401(k) schemes, whole insurance entities, as well as some reinsurance and non-life insurance portfolios (notably property and casualty). However, attention is shifting to Europe, with both US-based and European private equity firms becoming more prominent consolidation agents.

Both demand on the private equity side and supply on the insurers’ side are driving this trend.

Depressed returns in the current low interest rate environment are weighing on insurers’ profits. Growing liability burdens, especially in markets where life insurance rates are contractually guaranteed, are further pushing insurers to wind down all or part of their non-core businesses and reposition their strategies. Regulatory rules – such as the Solvency Capital Requirement and upcoming IFRS 17 on how insurance contract liabilities are calculated – along with a need for insurers to move off legacy technology platforms and invest in more up-to-date IT solutions are adding to company pressures.

Fuelled by record levels of capital to be deployed in the market, cheap debt, and growing deal competition for new investment opportunities, private equity firms for their part have been keen to diversify into uncorrelated but potentially profitable business areas. The steady long-term cash flows these books of business generate, insurers’ high client retention rates, and the prospect of ongoing insurance premium growth in the EU market fit that bill.

What capabilities can private equity firms bring to these insurance books?

Christelle Ybanez: Private equity players usually bring multi-asset class investment expertise across various areas, including private equity, debt and real assets. By leveraging this expertise and diversifying into a broader mix of multi-asset funds, private equity backers can boost the insurance portfolio’s risk-weighted returns, helping them enhance the books’ profitability.

Christiane Schmidt: Private equity firms will be further helped by their appetite for capital synergies, and knowledge of how to efficiently structure and finance complex deals. Experience in M&A-related deals including debt financing and restructuring tends to be in their DNA.

Drawn by the regular cash flows and associated stability these portfolios bring, firms are also demonstrating a long-term commitment to the entities they acquire, and will undertake detailed and frequent reviews of their portfolios and holdings to ensure they continue to run profitably.

How do private equity firms typically structure these M&A deals?

Christiane Schmidt: A recurrent strategy we see is for private equity companies to sponsor and advise an insurance consolidation platform, which has been established as a separate dedicated entity for the purpose of acquiring an insurer or specific portfolios. The specific mechanisms vary though by firm and from deal to deal, with permanent capital vehicles becoming increasingly popular.

One approach, pioneered in the United States, is for the private equity-sponsored “insurance consolidator” to acquire a target entity in its entirety. For example, Apollo-backed Athora, a Bermuda-domiciled insurance and reinsurance group, has completed three acquisitions in recent years: Delta Lloyd Deutschland in 2015; Aegon Ireland in 2018; and Generali Belgium in January 2019 (a EUR 540 million deal that included its management team).

Other transactions focus solely on the targeted insurance portfolios or cover the full life insurance business, including pension insurance contracts. We saw this with the purchase last year by life insurance consolidation platform Viridium Group – founded by a Cinven/Hannover RE joint venture – of German life insurer Generali Lebensversicherung in a deal valued at up to EUR 1 billion. Viridium also enters into third-party service agreements to manage insurers’ life portfolios or ALM arrangements.

Another option is to take a majority or minority stake in the target’s business. Cinven did this when it spent approximately EUR 300 million on a majority stake in Heidelberger Leben, which provides retirement and life insurance products. Cinven has employed Heidelberger Leben subsequently as a consolidation platform for life insurance portfolios in Germany. Cinven adopted a similar strategy in the UK, investing GBP 275 million in Guardian Financial Services and using it as a consolidation platform for the UK closed life insurance market.

By increasing the number of policies managed on a single common platform, these strategies aim to generate economies of scale and thus reduce the administrative costs per policy.

Christelle Ybanez: It is also worth noting that while US and European players have been the primary private equity-driven insurance consolidators in Europe so far, Asian firms could become more prominent. For example, back in 2016, Fosun’s Frankfurter Leben run-off vehicle acquired the life insurance business of Germany’s Arag. No other direct Chinese deals are in the works at present, but we expect to see more activity going forward.

What role do asset servicing providers play in the consolidators’ success?

Christelle Ybanez: Historically, private equity firms have specialised in multi-asset class investment, not necessarily in insurance management. Ordinarily they don’t possess the servicing skills or IT infrastructure to run the business themselves, especially given the onerous administrative requirements and regulatory pressures. Which is why they typically want to outsource the middle- and back-office functions to an experienced service provider.

Enhancing an acquired company’s operational efficiencies is a big step towards optimising its profitability and sustainability. When faced with an insurer that is active in multiple jurisdictions and runs on a patchwork of legacy systems, some of which may be nearing obsolescence, a key objective therefore will be to simplify its often complex operating model.

A service provider with an international presence can deliver the economies of scale the private equity firm needs to generate efficiencies and reduce the insurance platform’s costs. Highly-trained individuals who understand the complexities of servicing the insurance business can also provide technical knowledge and service expertise to meet the insurer’s compliance and regulatory obligations. Plus a quality third-party provider shall be well-positioned to adapt to the insurer’s evolving needs and deliver timely support to the insurance business across different locations – including meeting local GAAP requirements.

Another common challenge for insurance companies doing business in multiple countries on different operating platforms is to aggregate the data the various entities produce. Collecting, cleansing and interpreting this data are crucial to making high-quality investment decisions.

In addition, any shift towards more complex, multi-asset investment policies calls for a provider that can deliver multi-asset servicing and custody. Private equity acquirers may also need financing for some of their newly-created structures, as well as collateral exchange and collateral management capabilities to optimise their collateral needs and operational efficiencies.

All of which take scale, operational functionalities and expertise – capabilities that lie at the heart of an experienced asset servicer’s proposition.

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