2018 Insurance M&A Outlook
The deal landscape continues to evolve
How will the tax reform and regulatory policy influence insurance M&A activity? What impact will rising valuations have? Should companies buy, invest, or partner in InsurTech? The 2018 insurance M&A outlook from Deloitte examines the trends and challenges insurance executives should consider as they plan their M&A strategy for 2018 and beyond.
An evolving M&A marketplace
What’s noteworthy about 2016 and 2017 is an evolving industry and M&A landscape that is setting the stage for a positive deal-making environment in 2018. Environmental conditions are ripe to continue the insurance M&A activity of 2017’s second half. Investor and consumer confidence is high; the US and global economies are improving; US tax reform was signed into law; interest rates are moving in the right direction; organic growth remains elusive; and available capital remains at an all-time high.
Even though sources of uncertainty remain, the 2018 deal volume is expected to be largely consistent with 2016 and 2017 as companies look to utilize M&A to achieve their strategic objectives.
Download our 2018 insurance M&A outlook for insights on 2017 insurance M&A activity and a detailed look at the key trends and challenges for 2018.
Drivers of insurance M&A activity
Insurance company executives contemplating selling, buying, or partnering in 2018 should consider seven trends that are evolving the insurance M&A outlook—and could either help or hinder the execution of strategic plans.
- Modularization of the value chain
Companies are examining their operating models and rethinking if and how they play within various components of the value chain. Technology is enhancing organizations’ ability to specialize only in the components of the value chain where they believe they can create a competitive advantage. Therefore, we expect more transactions done specifically to implement strategic decisions around value chain participation.
- Tax reform and regulatory policy
The goal of US tax reform, effective January 1, 2018, is to reduce the corporate tax rate and redesign taxation of international operations to make US companies more competitive globally. The overhaul also provides a number of changes specific to insurance industry taxation that will impact insurers and require evaluation in the M&A process. In addition, regulatory changes could lead to increased compliance requirements, which may prompt some insurers to consider the desirability of continued engagement in some markets.
A continued upward trend in valuations in 2018 could have diverging implications for insurance M&A activity. Richer valuations may increase overall deal value for sellers, but may widen existing price gaps, making offered properties less attractive to potential buyers. Rising interest rates may also impact valuations and influence the 2018 insurance M&A outlook.
- New buyers
Sovereign wealth funds, pension funds, closed-block specialists, and special purchase acquisition companies (SPACs) that have lower cost of capital are emerging as highly competitive buyers in the US insurance space.
- Foreign investment in the US market
The US insurance market continues to attract the interest of foreign investors, especially Chinese and Japanese companies. Market trends also suggest the potential for heightened interest by European buyers. However, inbound deal activity must overcome some hurdles in 2018.
- InsurTech: Buy, invest, or partner?
InsurTech continues to garner considerable industry attention, given the strategic importance of technology investments. As detailed in Deloitte’s The state of the deal: M&A trends for 2018 acquiring technology assets ranks number one as a strategic driver of M&A activity.
- Divesting noncore business
Many insurance companies are considering divesting noncore assets for competitive and regulatory reasons. The challenge is that many companies are wrestling with the idea of what’s “core.” As these companies’ strategies come into focus, the shedding of more lines of business is likely.
Moving forward on 2018 insurance M&A opportunities
Within the evolving insurance industry landscape, the stage is set for an active deal-making environment in 2018. To move forward with confidence and make optimal use of available capital, executives should link M&A efforts to their overall growth strategy.
In addition, those contemplating M&A should examine the company’s existing portfolio, consider divesting assets that may no longer be core, and evaluate acquisitions or investments that will improve positioning in core markets. And thorough due diligence and effectively planning for integration should be the focus at the beginning of the process, not after the transaction closes.
For more on these insurance M&A drivers and trends, and to take advantage of opportunities in 2018, download the PDF.