Despite a blockbuster IPO by Athene Holding Ltd. in the final month of 2016, public offerings in the insurance space were exceedingly rare for a second consecutive year, underscoring the impact of ultra-low interest rates on the industry as a whole.
But as the smoke clears from the U.S. presidential election and June's unexpected Brexit decision, industry experts anticipate that the IPO market will pick up early in 2017. For insurance companies whose margins are directly impacted by low interest rates, a rally in government bond yields and a 25-basis-point rate hike by the Federal Reserve have provided a noticeable boost.
Capitalizing on a post-election surge among financial stocks, Athene's IPO of 27 million class A shares on Dec. 8 raised $1.1 billion, ranking among the top U.S. offerings for the year. Athene, a Bermuda-based insurer with a heavy concentration in annuity products, expected to sell 23.75 million class A shares in the IPO, according to The Wall Street Journal, raising an estimated $950 million. As Athene entered the market in early December, main rivals in the fixed annuity business such as American Equity Investment Life Holding Co. continued to ride the momentum from President-elect Donald Trump's victory. American Equity's stock soared in excess of 25% in the span of a month.
"We were very fortunate, I don't think we thought we would see this type of rally at year-end," Athene President William Wheeler said in a Dec. 9 interview. "We feel lucky, sometimes it's better to be lucky than smart."
Debuting at $40 a share, Athene is valued at 1.21x its Sept. 30 book value per share of $33.06, excluding accumulated other comprehensive income, slightly outperforming a number of industry peers. The current market conditions contrast starkly from MetLife Inc.'s IPO in 2000, when the company raised $2.88 billion, less than half of its initial target of $6.1 billion.
"Both companies came out with this IPO, it was an important goal for them and they both thought they had something to prove," said Wheeler, who served as a senior vice president at MetLife at the time of its IPO. "Met made a really good run after that IPO, and I have high expectations for Athene as well."
Athene landed in elite company with the pricing, joining MetLife as one of only nine U.S.- and Bermuda-based insurance underwriters covered by S&P Global Market Intelligence since 2000 to raise at least $1 billion through an IPO. MetLife, along with competitors such as John Hancock Financial Services Inc. and Travelers Property Casualty Corp., went public in a period marked by a wave of demutualization, as companies sought to escape the burdens of onerous financial restraints.
"One reason for fewer IPOs in recent years is that most of the big mutual companies have already converted into stock companies," said Jay Ritter, Cordell Eminent Scholar chair at the University of Florida's Warrington College of Business. "Other waves have been through reinsurance companies recapitalizing the industry after losing something."
While data compiled by Ritter shows that there have been 236 insurance company IPOs in the U.S. since 1980, there have been only three since the end of 2014, including Athene's. Although there have been 22 IPOs involving insurance companies over the past decade, the industry went without a single offering in four of those years. For a decade-long stretch ending in 2001, 115 insurance companies completed an IPO, including 62 in a three-year stretch beginning in 1991.
Athene shares gained more than 10% on its first day as a publicly traded company, outperforming an industrywide average first-day return of 8%, according to figures from Ritter's database. The selected insurance stocks also appreciated by an additional 12% in the first year following their IPO, Ritter said, while factoring in dividends and capital gains. Athene peaked on Dec. 16 at $47.29 per share, up more than 15% from its market debut.
Months before Athene went public, Kinsale Capital Group Inc. priced its IPO of 6.6 million common shares at $16.00 per share.
Kathleen Smith, manager of IPO-focused exchange-traded funds at Renaissance Capital, expects the IPO market to rebound in 2017 as companies look to take advantage of the post-election rally. Despite a lack of overall offerings in 2016, Smith said financial stocks are projected to appreciate approximately 40% from their initial price, finishing the year as the best-performing sector in the IPO market.
"Generally strong returns beget issuance," Smith said. "If there are insurance companies out there that think they should go public or spin off, this would be the time to do it."