Nicholas Potter, 49, a corporate partner and cochair of the financial institutions group at Debevoise & Plimpton
Canadian insurance company Sun Life Financial and specialty insurer Markel Corporation (Potter led Debevoise teams advising both on separate deals).
Sun Life, Canada’s third-largest life insurer, announced December 17 that it plans to sell its annuity business and some of its life insurance units to financial services firm Guggenheim Partners for $1.35 billion. Two days later, Markel said it had agreed to buy Bermuda-based Alterra Capital Holdings for $3.13 billion.
The Sun Life units are being purchased by Delaware Life Holdings, a company owned by Guggenheim shareholders. (A group of Guggenheim investors made news last March by purchasing the Los Angeles Dodgers.) The deal is expected to close by the third quarter of next year.
Markel’s proposed acquisition, meanwhile, is expected to close in the first half of 2013, pending shareholder and regulatory approvals. Markel is offering $10 in cash and just under 0.043 of one of its own shares for each Alterra share, which The New York Times pegs at a premium of nearly 34 percent over Alterra’s $23.15 closing price Tuesday.
THE BIG PICTURE
Potter—who has worked almost exclusively on insurance-related M&A and corporate finance deals for the past 20 years—says both the Sun Life and Markel transactions highlight industry trends.
The Sun Life deal, he notes, represents the first major sale of a variable annuity business following a period that saw the sector gain popularity while “the stock market was up, up, up” only to lose favor with the onset of the economic downturn. With the economy faltering, he says, it became difficult to deliver annuity investors the guaranteed returns they are due regardless of how the market performs, and “now you have companies looking to strategically deal with these businesses.”
While Potter acknowledges that finding “the right buyer” for what some consider an unattractive asset can be difficult, he says a private company like Guggenheim can try to maximize the profits from such a business without feeling pressure from public shareholders.
In essence, he adds, the Sun Life sale falls into the category of “protracted postcrisis fallout.”
The Markel deal, meanwhile, underscores the continuing consolidation of the insurance market in Bermuda, a locale that Potter says insurers have flocked to over the past decade or so. All that movement, he adds, has left “a lot of capital sitting out there.” As a result, Potters expects one or two major deals a year in the British island territory going forward. (As if on cue, Pembroke, Bermuda–based life insurance holding company Athene, a unit of private equity giant Apollo Global Management, announced Friday that it has agreed to buy the U.S. units of British insurer Aviva for $1.8 billion.)
Both of Potter’s clients saw their share prices dip when the deals were announced, something he says wasn’t entirely unexpected. “These are long-term deals,” he explains. “The benefits will pay out over time.”
Potter has done a handful of deals for Sun Life over the past three or four years, including the sale of its life reinsurance unit to Berkshire Hathaway for an undisclosed amount in 2010. And while the Alterra acquisition is the first deal Potter has done for Markel, the Richmond-based company’s ties to the firm go back a long way. Markel general counsel Mike Jones got to know Debevoise presiding partner Michael Blair when both were young lawyers, Jones at McGuireWoods and Blair at Debevoise.
Though the deals were announced at roughly the same time, work on the Sun Life transaction lasted longer because it involved a drawn-out auction process, Potter says. (Sun Life announced a year ago that it planned to stop selling new annuities in the United States and cut 800 related jobs.). Now, both must navigate the regulatory process, which in the insurance industry is mostly controlled by the states.
As a result of the Dodd-Frank Act’s passage, the industry is now subject to scrutiny—though not direct regulation—by the newly formed Federal Insurance Office. And Potter says a report from the federal government on the effectiveness of the current state-based regulatory system is a year overdue.
Call it another example of postcrisis fallout.