Regulatory considerations are playing an increasingly important role in the execution of insurance M&A transactions and the growth of insurtech companies.
"There's not a single Form A we do these days that doesn't have a complex component to it," Nicholas Potter, a partner at Debevoise & Plimpton LLP, said during S&P Global Market Intelligence's 8th Annual Insurance M&A Symposium. Potter was referencing the applications that insurers are required to file with regulators in their states of domicile upon a proposed change in control.
He said the increased complexity dates back to the post-financial-crisis era, when private equity-backed acquirers stepped up their pursuit of insurance M&A. It has been perpetuated by the heightened role of other forms of nontraditional buyers in more recent deals. In addition to continued participation from private equity, conference speakers referenced entities such as sovereign wealth funds, pension funds and family offices that have emerged.
Chinese acquirers have arguably encountered the stiffest resistance. Anbang Insurance Group Co. Ltd.'s proposed acquisition of Fidelity & Guaranty Life was terminated in April. Genworth Financial Inc.'s proposed sale to China Oceanwide Holdings Group Co. Ltd. remains subject to regulatory review, which has effectively been held up by the Committee on Foreign Investment in the United States. It has been nearly a year since the parties announced the transaction.
"Deal after deal has been driven by the presence of nontraditional buyers," Potter said. "This has gone on and on."
Certainty of closing has become a key consideration for prospective sellers, who now may need to conduct due diligence on buyers to ensure they can fill out a Form A. While Potter said that question has been "asked and answered" by this point as it pertains to private equity-backed acquirers, it remains a possible sticking point for other nontraditional buyers.
In the past, Potter said, parties to M&A deals often conducted pre-announcement meetings with regulators that were "full of platitudes." Now, he said, they are "often quite rigorous." Additionally, parties now commonly attach a completed Form A to a signed purchase agreement and file it shortly after the date of the transaction's announcement as opposed to 30 days later as had been typical.
"There is an intensive focus before a deal is signed that all of the t's are crossed and the i's are dotted," Potter said.
The completion and approval of a Form A may not be a consideration for many insurtech companies, the vast majority of which do not operate as admitted carriers. But that does not mean they do not encounter regulatory risks.
Rich Buckley, vice president and corporate counsel at Prudential Financial Inc., said during the conference that he has seen an "enhanced regulatory focus" emerging in various places, including as it pertains to the OCC's financial technology charter.
"The Uber approach would never work in financial services," Buckley said in reference to the ridesharing service. He added that insurtech firms need "a comprehensive strategy for engaging with regulators as opposed to ignoring them."
Martha Notoras, a partner with XL Group Ltd's XL Innovate, said the technology company her firm invests in has "gotten in the habit of meeting with regulators." And, she added, they have been "very open to having essentially hypothetical conversation with startups."
Although regulators "often poke holes" in the companies' strategies, Notoras said, she took the California Department of Insurance's May press release welcoming insurtech startup Slice, a surplus lines broker offering products to home-sharing hosts, to the market as a positive sign.
That announcement, she observed, offered "a signal that regulators are positioning themselves as wanting to be a part of the solution to some of the issues facing the industry."
Alex Timm, CEO of Root Insurance Co., said during the conference that his company encounters no shortage of risks on the regulatory front as a Columbus, Ohio-based insurtech-driven auto insurance carrier. He said Root's status as a "full stack" company "slows things down" as it seeks to build its business, but the benefits outweigh the drawbacks.
Partnering with established carriers as some insurtech firms have done, Timm explained, would make it "difficult to disrupt this massive industry" as that approach would have added "layers upon layers of costs." Instead, he said, Root is seeking to reinvent the business from "the ground up" while remaining "in control of our own destiny."