Sector focus: Playing it safe in the insurance market

CVC's recent purchase of D&G from Advent International secured fully committed debt financing from a raft of top brass lenders including Goldman Sachs, Barclays, Credit Suisse, BNP Paribas, Morgan Stanley, Société Générale and UBS, highlighting the attractiveness of insurance companies in the current climate.

In the period 2005-2012, the strongest year for private equity buyouts in the insurance market was 2010, which saw six deals reaching a combined total of €1.8bn across Europe, according to unquote" data. The UK led the pack having housed 24 insurance deals during the seven-year period. And for the bumper year that was 2010, the UK was again on centre stage with two deals making up 72% of the €1.8bn total. Those were Apollo and CVC's take-private of Brit Insurance for £850m and Electra Partners' and Penta Capital's purchase of esure for £270m.

This year appears to be on course to match the frenzy of deals seen in 2010, with a swathe of deals completed already, including the more recent purchase of Heidelberger Leben by Cinven, Alchemy Partners' sale of Cathedral Capital, Anacap's buyout of Simply Business, Aquiline Capital Partners' acquisition of Equity Insurance Group and Palatine Private Equity's purchase of Chase Templeton.

The sector is home to a consistent high level of M&A activity, which looks set to continue

Irresistible investment
Insurance companies are topping buyout houses' wish lists for several reasons. First and foremost, these businesses are cash-generative, making them ideal additions to any portfolio.

The recent surge in activity reflects the performance of listed counterparts, which in recent weeks have seen climbing share prices. For example, last week UK life insurance company Resolution's share price jumped 4.1% after first half profits defied expectations, while Legal & General rose 1.1% on the same day. As valuations of listed insurers stabilise, willingness to sell entire companies or divisions naturally increases thanks to clearer and more justified price expectations.

Another key development boosting deal activity has been improved clarity around incoming regulation, allowing insurers to better plan ahead and make well-informed decisions concerning division disposal. As firms better acquaint themselves with the requirements of Solvency II, confidence is sure to increase, especially against a backdrop of encouraging macro growth figures with the eurozone now officially out of recession.

Furthermore, despite causing frustration for GPs that will no longer be able to receive LP commitments from insurance companies, Solvency II is forcing insurers to take a long hard look at capital requirements. This is potentially hugely advantageous for the asset class as it is likely to reduce insurance companies' appetite for M&A in the short term, pushing out a key competitor in sales processes. However, when looking at potential investments it will be crucial that targets are prepared for the new rules as pumping more cash into the business to meet new capital requirements will damage eventual returns.

Changing regulatory conditions and a lack of insurance companies in distress are combining to dampen sales of entire companies at low prices and instead motivating selective exits in certain countries or business lines. For example, at the start of the month it was reported that Dutch bank ING was in talks with MBK Partners over the sale of the bank's Korean life insurance arm. One portfolio company that is attracting a lot of attention in this sector is Acromas, owned by CVC, Charterhouse and Permira, which is expected to be split up to allow a profitable exit. This serves as more good news for private equity as the industry is better-suited to managing more complex transactions and carving out deals than trade buyers. Deal processes are likely to be longer than more straightforward transactions, but lengthy processes seem to be the norm in the bulk of today's buyouts.

In the spot light
However, increased regulation for insurance companies following the financial crisis has also intensified the regulator's focus on the insurance market. Looking over to the US, Apollo was recently awarded clearance for its acquisition of Aviva's US annuities business following a nine month investigation by Ben Lawsky, New York's superintendent of financial services, into the suitability of private equity firms as owners of insurance companies. Thankfully, Apollo quelled fears over the asset class's perceived short-term focus by agreeing to heightened capital standards as well as quarterly (rather than annual) filings, and directly reporting capital levels to the regulator.

When it comes to exiting insurance businesses, as with most sectors in the current market, selling to other private equity houses is one of the most viable options. However, Cinven's recent listing of Partnership Assurance on the London Stock Exchange generated a whopping 7x return for the buyout house, and proved institutional investor appetite for this breed of businesses with Blackrock picking up a 3.4% stake on its first day of trading.

The cash generative nature of insurance companies and tangible exit routes are clearly making investments in this space increasingly attractive for private equity. However, complex and overbearing regulation makes deal-doing more time consuming and convoluted and therefore the domain of buyout houses with the necessary patience and experience.

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• Topics
• Financials
• CVC Capital Partners
• Advent International
• Apollo Management
• Electra Partners LLP
• Penta Capital Partners
• AnaCap Financial Partners
• Palatine Private Equity
• ING
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