Could insurance be private equity's next European payday?

The European insurance market has attracted a lot of attention from private equity firms in recent times as big deals have been grabbing headlines, notably with the announcement of Bain Capital's £1.2 billion acquisition of multi-insurance provider esure—one of the biggest deals in the industry in a decade. Facing advances in technology, increasing regulation, low interest rates and challenging operating ratios, insurers are being forced to find new ways to remain competitive, which will require additional capital—and PE firms are proving more than happy to provide the funds to do so. 

Return to grace

European insurance deals this year have already surpassed the total value of those completed in 2017 standing at €1.63 billion and €910 million respectively, per the PitchBook Platform. In fact, the value of completed transactions has nearly reached the level last seen in 2016 of €1.64 billion. Although insurance's private equity heyday was in 2015, when it saw nearly double the amount of capital—€3.4 billion—deals such as esure's will help narrow the gap.
 
The dip in capital from 2016 could be partly explained by the arrival of Solvency II, an EU-wide regulation with the aim of creating a standard for the insurance market by placing new reporting requirements on firms, which made it difficult for investors to determine how much cash insurers were generating—not an ideal situation when deciding whether to pour large amounts of money into a company. 

The impact of Brexit is also not negligible as the UK is by far the leader in deal count and capital investment in the industry—with over half in both categories—and some firms may have been hesitant to invest under the cloud of uncertainty. However, the aforementioned data shows that there are signs that the industry will return to the heights of 2015, if not this year, then in the near future. 

Solid outlook for growth

Growth in the European market is expected to be steady with a pick-up in premiums anticipated. Global re-insurance giant Munich Re forecasts that by 2030, the volume of primary insurance premiums will grow to around €1.8 trillion from €1.2 trillion. The continent is home to two of the largest primary insurance markets—France and the UK. Premiums in those countries will rise from €214.9 billion and €267 billion in 2017 to €319.5 billion and €403.3 billion in 2030, respectively, per Munich Re. 

Within the life insurance segment of the market, premiums are set to increase in Western Europe an estimated 0.6% in 2018 from 2017 and 1% in 2019. In Eastern Europe, premiums are set to skyrocket, rising 9.4% and 8.3% in the next two years. Property and casualty will see more growth in Western Europe, 1.9% and 1.8% for 2018 and 2019, respectively, while the other side on the continent is expected to generate 4.1% and 3.6% growth. 

Based on these figures, both traditional areas of insurance are likely to produce steady flows of revenue, making insurance companies an attractive investment option for private equity if they are looking for long-term investments. While the P&C insurance industry has seen little activity from private equity firms this year, Cinven's upcoming acquisition of AXA Life Europe, which is estimated to be worth €925 million, shows that interest is there, which in Cinven's case is due to the fact that a number of European insurers are looking to dispose of their non-core portfolios, creating an attractive M&A pipeline. 

What's next? Insurtech

New areas of insurance are also opening up to private equity investors driven by the evolution of new technologies. Currently sitting under the umbrella of fintech, insurtech is the technology that lies behind the insurance business, including smartphone apps, claims processing tools, online policy handling and automated processing. While insurtech hasn't reached the level of maturity to garner much interest for private equity investors, there have been a few deals including £675 million of development capital received by BGL from Canada Pension Plan Investment Board. According to data from PitchBook, 34 private equity deals have taken place in the insurtech space since the beginning of 2015, however, 233 venture capital deals were completed in the same period, which could create opportunities in the future. 

Private equity interest in insurance is likely to grow as steady income and predictable cash flow makes the companies in this space attractive long-term investments. In addition, the emergence of insurtech startups are likely to mature into a fully-fledged industry vertical as the appeal of technology grows providing opportunities for PE firms. 
 

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