U.S. life M&A activity to slow due to economic and regulatory concerns: Moody’s

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Mergers and acquisitions and divestments in the U.S. life insurance industry will continue in 2022 and 2023, according to a Moody’s report, however, weakening macroeconomic conditions and new regulatory hurdles are likely to slow activity and reduce somewhat the flow of transactions.

From a credit perspective, mergers and acquisitions and divestitures are generally good for sellers, Moody’s says, but less so for policyholders transferring to weaker third parties. The report also notes that the effects vary depending on the structure of the transaction.

He writes: “With more than $1 trillion in legacy reserves currently on industry balance sheets, mergers and acquisitions present advantages for both buyers and sellers that are likely to encourage continued interest from private capital. “

Moody’s suggests that life insurers have adapted, shifting from providers of interest-rate-sensitive guaranteed protection and annuity products to less capital-intensive businesses, such as fee-based asset collectors and managers, trustees and benefits and specialist healthcare providers.

With the entry of private equity (PE) firms into the insurance industry, the report notes the emergence of business strategies that combine the interests and expertise of private equity, life insurance and asset managers.

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He adds: “Private equity acquirers are using offshore reinsurance markets to expand the balance sheets of life insurance companies, increasing assets under management and returns from fixed income portfolios, a strategy that will expand the transaction activity.”

According to Moody’s, the expansion of insurers’ balance sheets will also boost the sector’s growing share of illiquid portfolio investment.

Higher interest rates allow buyers to earn higher investment returns on the acquired business, which may include less liquid, higher yielding, often higher risk assets.

However, a slowdown in growth is clearly ahead, the report says, which should slow activity. In addition, recent market volatility, falling equity prices and rising inflation all present valuation risks that could reduce net trading volumes.

The report notes, “The National Association of Insurance Commissioners (NAIC) is stepping up its efforts to better understand the breadth of the reach of private equity in the insurance industry, and the U.S. Senate Banking Committee continues to investigate and examine the growing role of private equity firms in the insurance industry. »

“Insureds and creditors are at higher risk of loss if their PE owners have weaker credit characteristics and higher risk appetite than traditional life insurance acquirers.”

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