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Deloitte 2018 Insurance M&A Outlook Summary

Core Content

This document provides an overview of the insurance M&A landscape in 2017 and forecasts the trends for 2018. It highlights the evolving industry environment, key factors influencing M&A activity, and strategic considerations for insurance executives.

2017 M&A Review

Overall Trends

• Deal Volume and Value:
  • Total deal volume increased by 12% (from 554 to 621 deals).
  • Total deal value decreased by 30% (from $29.0 billion to $20.2 billion).
• Broker Transactions:
  • Broker deal volume reached a record high with 537 transactions.
  • Broker deal value dropped by 26% due to fewer large deals.
• Large Deals:
  • Seven deals valued at $1 billion or more were announced, same as in 2016.
  • No deals reached the $5 billion threshold.
• Underwriter Deals:
  • Underwriter deal volume decreased by 13% (from 97 to 84).
  • Underwriter deal value fell by 32% (from $21.7 billion to $14.8 billion).
  • Average deal value increased by 11% (from $380 million to $422 million).
• Life and Health (L&H) Deals:
  • L&H deal volume remained consistent with 2016 and most years since 2006.
  • L&H deal value increased by 61% due to two large deals.
  • Average deal value increased by 74% (from $291 million to $505 million).
• Property and Casualty (P&C) Deals:
  • P&C deal volume decreased by 24% (from 70 to 53).
  • Only two P&C deals exceeded $1 billion in value.
  • Average deal value increased by 11% (from $409 million to $372 million).

Influencing Factors

• Investor Uncertainty:
  • Early 2017 was affected by uncertainty following the 2016 US election.
• Foreign Investment Constraints:
  • Chinese and other foreign buyers faced regulatory hurdles.
• New Institutional Capital Sources:
  • Sovereign wealth funds, pension funds, and closed-block specialists emerged as key buyers.
• Noncontrol Investors:
  • PE firms and VC funds became more active without seeking operational control.
• Capital Efficiency:
  • Improved global capital deployment reduced "lazy" capital.
• InsurTech Interest:
  • Strategic investments in InsurTech continued to grow in significance.
• Valuations:
  • Insurance valuations were higher in 2017, making ROI justification more challenging.
• USD Decline:
  • A weaker USD increased the attractiveness of US insurance assets to non-US buyers.

2018 Outlook

Expected Trends

• Deal Volume and Value:
  • M&A activity is expected to remain consistent with 2011–2017 levels, excluding 2015.
  • Most deals will be smaller than $2 billion.
• Strategic M&A:
  • Companies will use M&A to achieve strategic goals, including growth and innovation.
  • No major blockbuster deals like ACE/Chubb are expected, but smaller and mid-sized deals will increase.
• Subsector Focus:
  • L&H: Continued growth through acquisition due to limited organic growth.
  • P&C: M&A will focus on small-to-medium specialty carriers, especially for overseas players.
  • Reinsurance: Uncertainty about rate increases may drive more M&A activity.
  • MGAs: Brokers may acquire digital MGAs to enhance distribution capabilities.
  • Run-off Transactions: Increased activity in transferring long-tail liabilities.

Key Drivers

1. Modularization of the Insurance Value Chain:
   • Companies are focusing on specific components (distribution, underwriting, capital sourcing) to enhance ROE.
   • Technology enables specialization and strategic transactions.
2. Tax Reform and Regulatory Policy:
   • US tax reform (Act) reduced corporate tax rate from 35% to 21%.
   • Changes to international tax rules may require restructuring for tax efficiency.
3. Valuations:
   • Higher valuations in 2017 may make ROI justification harder for buyers.
4. Emergence of New Buyer Types:
   • Sovereign wealth funds, pension funds, and closed-block specialists are becoming more active.
5. Continued Foreign Investment:
   • Foreign buyers are increasingly interested in US insurance assets.
6. InsurTech Investment:
   • Pressure to invest in InsurTech will continue, with options including acquisition, investment, or partnership.
7. Divesting Noncore Business:
   • Companies are likely to divest noncore assets to focus on strategic growth areas.

Conclusion

The insurance M&A market in 2018 is expected to remain active, driven by strategic imperatives, tax reforms, and the emergence of new capital sources. While large deals are not anticipated, the market will likely see a rise in smaller and mid-sized transactions. The industry will continue to evolve with a focus on modularization, digital innovation, and global capital flows.