Sellers of life insurance portfolios have to meet buyers’ growing expectations for understanding the capital implications of a transaction in advance of a deal.
Two overriding issues have shaped mergers and acquisition (M&A) activity in the European life insurance market in recent years – Solvency II and ultra-low interest rates.
Solvency II has been the catalyst for regulators in certain European countries, such as Germany and the Netherlands, to require many insurers to strengthen their balance sheets. “Lower for longer” interest rates have made the problem even more acute for companies with traditional participating business. These two factors have badly damaged the dividend potential for many companies and some of these are now seeking to shed portfolios with high capital requirements, low return on equity, or both. Consequently, the closed fund deals that have become relatively commonplace in the U.K. are rising in frequency across Continental Europe.
Capital optimisation is central to the success of these deals. Potential buyers are particularly interested in understanding:
- The amount of capital that could be released
- The diversification benefits of a deal combining two portfolios
- The impact of alternative asset and reinsurance strategies
- The likely reaction of stakeholders, including the regulator, to various options
To analyse these factors accurately, buyers need a lot of information about a potential deal in advance.
Change of approach
It is becoming increasingly evident that the traditional actuarial seller’s report is seen as falling short of the mark. Buyers want a more sophisticated approach, giving them the building blocks they can use to assess the capital impacts of combining the target portfolio with their own business, as well as the usual information about the timing of free cash flow from the target business.
This is the direction we’re taking at Willis Towers Watson. We are also seeing increasing co-operation between sellers and buyers to help the buyer get the right answer. For example, in a recent proposed merger, both parties needed to understand the capital impacts. Within the deal timetable of a handful of weeks, we helped them produce a comprehensive and detailed capital model across the combined group, using the proxy modelling approach favoured by regulators. Moreover, it provided a tool that allowed easy testing of sensitivities to assumptions, different stress scenarios and the impact of a range of corporate structures.
This is the inevitable future of life insurance M&A. A collaborative approach between sellers and buyers, using robust software tools to deliver analyses within tight timetables, will make it possible.
Guest blogger Steve Taylor-Gooby is a managing director in the life insurance risk practice at Willis Towers Watson.