Tax reform, InsurTech and run-off transactions will be among the big drivers of insurance industry mergers and acquisitions in 2018, according to a new Deloitte report.
Deloitte said that the Trump tax cuts passed in late 2017, however, appear likely to have a particularly proactive effect on acquisition appetite.
“The reduction of the corporate tax combined with the ability to repatriate cash from overseas operations at a significantly reduced rate could create additional capital for strategic deployment, including through acquisitions,” the Deloitte report noted.
The legislation let insurers, agencies and other businesses organized as C corporations get a statutory tax rate cut from a top rate of 35 percent to 21 percent.
Run-offs, InsurTechs Also Could Propel More M&A
Deloitte believes that M&A will also continue getting a boost from run-off transactions, where companies that have stopped writing a type of business transfer/sell those particular long-tail legacy liabilities to a rival.
“The viability of the run-off business model was reinforced in 2017 when a number of highly credible investors with extensive experience in the insurance industry created entities designed to accumulate specific types of run-off business,” according to the report. By doing so, the industry saw more capital at the ready last year to support run-off acquisitions, and Deloitte said it expects continued growth in the run-off market through the coming months.
InsurTechs are another driver of present and future M&A activity, according to Deloitte. These startups initially set out to transform the industry and compete with established carriers, though many now are forming partnerships or taking on investment from old-school insurers.
“Pressure will continue to build on insurance companies to invest in InsurTech, either by acquiring a technology startup, becoming a minority owner, or investment in the portfolios of VC/PE funds or incubators,” Deloitte said. InsurTech investments were only a small portion of insurance companies’ invested capital over the last five years, but Deloitte argued that greater pressure to innovate will boost that number.
“The need to innovate – especially from a digital perspective – will continue to fuel companies’ interest in gaining access to InsurTech capabilities,” Deloitte asserted.
Here are some other Deloitte M&A predictions and identified drivers for 2018:
- Transactions will likely be smaller and valued at less than $2 billion, save for a handful of larger deals worth $5 million or higher.
- The record number of natural catastrophes in 2017 likely won’t raise rates to boost margins enough, so the expectation is that M&A will continue among P/C companies seeking scale, reach and better margins. These deals will involve small to medium P/C specialty carriers in particular. These specialty carriers “are appealing acquisition targets, especially for overseas players,” Deloitte said.
- Even with 2017’s record catastrophe year, the jury is still out about whether reinsurers can get significant rate increases in 2018, thanks to heavy competition and alternative sources of capital. That makes M&A a viable option once again this year. Deloitte sees AIG’s planned $5.6 billion acquisition of Validus Holdings as the latest salvo in what it expects will be an ongoing trend.
- Brokers seeking alternative distribution opportunities could seek out digital managing general agents in 2018, according to the report, in a way to broaden options for small to medium business customers that don’t want to buy insurance through traditional brokers.
- New CEOs at larger insurers could seek out acquisitions in 2018 as they seek to promote growth and boost performance, Deloitte predicted.
The full report is called “2018 Insurance M&A Outlook: The deal landscape continues to evolve.”