PE Firms Target Insurers
Experts are predicting an uptick in merger and acquisition activity within the property and casualty insurance marketplace, particularly by private equity firms and alternative asset managers. But it’s unclear whether more PE firms entering the sector will impact pricing for risk managers.
Nearly three-quarters (71 percent) of surveyed insurers, reinsurers and bankers that have worked on insurance M&A transactions said that alternative asset managers and/or private equity firms will be among the most active buyers within the P&C sector over the next 12 months.
The survey was part of a report, Global Insurance M&A Outlook, released in April by Mayer Brown global law firm, and published in association with Mergermarket.
Observers weighing in on the report had mixed predictions on the impact of that M&A activity on pricing for risk managers.
Within the P&C sector, prices are generally based on supply and demand, typically rising after a large catastrophic event, said Edward Best, a partner at Mayer Brown corporate and securities, and co-leader of the firm’s capital markets and financial institutions groups.
The greater the consolidation, the lower the supply and — theoretically — prices could get lower, he said.
“But the P&C market is so large, that the opportunity for private equity firms to consolidate the market could be very tough,” Best said.
With that said, however, PE firms do try to push efficiencies into the companies they buy, which could help the P&C industry drive down costs, he said. Large P&C insurers historically have not been highly efficient, although they are getting “much better at being disciplined,” he said.
“However, PE firms need to know something about underwriting to be successful in P&C lines, as losses from bad underwriting can really hurt a P&C company,” Best said. “Also, private equity firms tend to want to lever up companies they buy, and regulators may not allow that for P&C companies, because they need steady cash flow to service the debt and P&C companies could lose a ton of money.”
While holding companies with insurance units don’t need approval to borrow money, regulators must sign off on would-be acquirers’ financing plans before they approve the deals, he said.
PE firms may want to roll over debt and place it into the insurance unit as equity, but regulators are increasingly skeptical about whether this is truly capitalization, because the holding company could just take the cash back out to service the debt if they had to avoid default.
Best said he suspected that PE firms would instead just buy certain units of P&C companies, particularly those that are no longer writing business, but just have runoff.
“Then the PE firms are just servicing the runoff and that could bode well for them financially,” he said. “They might also want to buy certain lines of business that are high frequency, low severity, such as car insurance, but they still can’t put too much leverage in the business or they run into the risk of not getting regulatory approval for the acquisition.”
Robert Hartwig, president of the Insurance Information Institute in New York, agreed that longer-term pricing could theoretically improve if PE firms created large insurance companies by consolidating disparate operations of various insurers, as efficiencies through economies of scale could be realized.
“I would suspect that could happen within three to five years, but it would take a while to piece together an insurer of that magnitude,” Hartwig said.
Indeed, pricing of reinsurance has dropped since alternative capital has been flowing into the market from PE firms, hedge funds and institutional investments such as pension fund managers, he said.
Private equity firms have been investing in the P&C business for many years, but that stopped with the financial crisis in 2008, said Sean McDermott, a director at Towers Watson in Philadelphia.
“Now, a lot of PE firms are sitting on a pile of money that they have to either invest or return to investors,” McDermott said.
Currently PE firms as well as hedge funds are investing in existing companies or starting new companies — in fact, three new firms have started in Bermuda in the past two to three months, he said.
Usually, the “ultimate game” is to provide just reinsurance and just insurance coverage, but the new companies sometimes quickly move to offer both types of coverages, depending on the management’s strategy and “zeal for growth.”
“This creates more competition because there are new entrants to the market, which usually lowers pricing,” McDermott said. “But it is important to note that these firms move their capital into the market anticipating that ultimately the pricing will get better.”
While pricing is still positive on the P&C side, pricing in the third and fourth quarters of 2013 was somewhat smaller in magnitude than the increases reported in the second half of 2012 and first half of 2013, he said.
PE firms continue to invest into the market because they think prices will rise again, McDermott said.
Property reinsurance prices have started to decline for another reason: the increase of insurance-linked securities as an alternative option to transfer risk, he said. These contracts, which transfer risks to investors, provide competition to traditional reinsurers as well as the PE and hedge fund start-ups.
“But overall, for risk managers, capital flowing into existing carriers and new entrants as well as alternative ways to transfer risk has got to be better for them, compared to consolidation across the industry and leaving fewer players in the market,” he said. “This gives risk managers more product choices and alternatives to place their risks.”
Other key findings from the Mayer Brown report include:
• 88 percent of respondents said that M&A activity would rise in the P&C sector, spurred mainly by the improving economy.
• 85 percent said they would finance their acquisitions using their balance sheets, reflecting their strong capital position.
• 50 percent said that development of new distribution channels would be one of the most important alternative growth strategies.
Webinar: Improving Claims Outcomes Through More Effective Adjuster Management
Claims organizations need to solve a number of problems that are impeding adjusters from achieving good results for both payers and workers’ compensation claimants.
Due to changing regulations, provider consolidation and more – adjusters are overwhelmed and the bottom line is suffering as a result. Too many claims adjusters are so harried and distracted by their workloads that they are not efficiently performing the vital functions of closing claims, getting workers healthy and back to work and freeing up reserves. This is leading to unnecessarily high costs for payers.
Claims organizations need to figure out how to achieve the goals of maximizing provider networks and implementing predictive analytics in a way that will help adjusters do their jobs better, not further overwhelm them.
Expert panelists will address the following talking points:
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- The Use of Data: Using predictive analytics to complement adjuster case management, not impede or replace it.
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What Is Insurance Innovation?
Truly innovative insurance solutions are delivered in real time, as the needs of businesses change and the nature of risk evolves.
Lexington Insurance exemplifies this approach to innovation. Creative products driven by speed to market are at the core of the insurer’s culture, reputation and strategic direction, according to Matthew Power, executive vice president and head of strategic development at Lexington, an AIG Company and the leading U.S.-based surplus lines insurer.
“The excess and surplus lines sector is in a growth mode due, in no small part, to the speed at which our insureds’ underlying business models are changing,” Power said. “Tomorrow’s winning companies are those being built upon true breakthrough innovation, with a strong focus on agility and speed to market.”
To boost its innovation potential, for example, Lexington has launched a new crowdsourcing strategy. The company’s “Innovation Boot Camps” bring people together from the U.S., Canada, Bermuda and London in a series of engagements focused on identifying potential waves of change and market needs on the coverage horizon.
“Employees work in teams to determine how insurance can play a vital role in increasing the success odds of new markets and customers,” Power said. “That means anticipating needs and quickly delivering programs to meet them.”
An example: Working in tandem with the AIG Science team – another collaboration focused on innovation – Lexington is looking to offer an advanced high-tech seating system in the truck cabs of some of its long-haul trucking customers. The goal is to reduce driver injury and fatigue-based accidents.
“Our professionals serving the healthcare market average more than twenty years of industry experience. That includes attorneys and clinicians combining in a defense-oriented claims approach and collaborating with insureds in this fast-moving market segment. At Lexington, our relentless focus on innovation enables us to take on the risk so our clients can take on the opportunities.”
– Matthew Power, Executive Vice President and Head of Regional Development, Lexington Insurance Company
Power explained that exciting growth areas such as robotics, nanotechnology and driverless cars, among others, require highly customized commercial insurance solutions that often can be delivered only by excess and surplus lines underwriters.
“Being non-admitted, our freedom of rate and form allows us to be nimble, and that’s very important to our clients,” he said. “We have an established track record of reacting quickly to trends and market needs.”
Lexington is a leading provider of personal lines coverage for the excess and surplus lines industry and, as Power explains, the company’s suite of product offerings has continued to evolve in the wake of changing customer needs. “Our personal lines team has developed a robust product offering that considers issues like sustainable building, energy efficiency, and cyber liability.”
Most recently the company launched Evacuation Response, a specialty coverage designed to reimburse Lexington personal lines customers for costs associated with government mandated evacuations. “These evacuation scenarios have becoming increasingly commonplace in the wake of recent extreme weather events, and this coverage protects insured families against the associated costs of transportation and temporary housing.
The company also has followed the emerging cap and trade legislation in California, which has created an active carbon trading market throughout the state. “Our new Carbon ODS product provides real property protection for sequestered ozone depleting substances, while our CarbonCover Design Confirm product insures those engineering firms actively verifying and valuing active trades.” Lexington has also begun to insure new Carbon Registries as they are established in markets across the country.
Lexington has also developed a number of new product offerings within the Healthcare space. The Affordable Care Act has brought an increased focus on the continuum of care and clinical patient safety. In response, Lexington has created special programs for a wide range of entities, as the fast-changing healthcare industry includes a range of specialized services, including home healthcare, imaging centers (X-ray, MRI, PET–CT scans), EMT/ambulances, medical laboratories, outpatient primary care/urgent care centers, ambulatory surgery centers and Medical rehabilitation facilities.
“The excess and surplus lines sector is in growth mode due, in no small part, to the speed at which our insureds’ underlying business models are changing,” Power said.
Apart from its coverage flexibility, Lexington offers this segment monthly webcasts, bi-monthly conference calls and newsletters on key risk issues and educational topics. It also provides on-site risk consultation (for qualifying accounts), access to RiskTool, Lexington’s web-based healthcare risk management and patient safety resource, and a technical staff consisting of more than 60 members dedicated solely to healthcare-related claims.
“Our professionals serving the healthcare market average more than twenty years of industry experience,” Power said. “That includes attorneys and clinicians combining in a defense-oriented claims approach and collaborating with insureds in this fast-moving market segment.”
Power concluded, “At Lexington, our relentless focus on innovation enables us to take on the risk so our clients can take on the opportunities.”