This brave new decade may not bring flying cars, teleportation or an alien invasion, but it is a safe bet that emerging trends will drive the 2020 mergers & acquisitions scene to new horizons.
“I’ve never seen this level of capital circling the space,” says John Marra, U.S. insurance deals leader at PwC. “You have so much capital and so much capability for complex deals, it’s a perfect opportunity for it to continue being a very active space.”
Aided by the high levels of capital coming from both traditional acquirers of companies, such as mutual entities, and a highly active private equity presence, companies are increasingly seeking to declutter their closed block profile.
“A lot of public entities that wrote, for example, variable annuities and stopped selling it five years ago, don’t want that to be part of their public profile anymore, so they’re looking for a solution to exit that business and get back to core businesses,” Marra says. “Because you have the capital coming from private equity and entities that aren’t public, you can take that private, decide what the business model is going to be and then focus on being a consolidator.”
Other trends are taking insurance companies by surprise, derailing plans they made decades ago. In particular, Marra points out the “continuing period of low interest rates.”
“It’s hard for insurance companies,” he says. “They may have written this business 20 years ago assuming a 5-7% portfolio yield, but in today’s environment that’s not realistic—that encourages them to put in runoff or just exit the business.”
Another emerging factor skews companies’ visions for the future: social inflation.
“Courts are being more generous toward plaintiffs,” Marra says. “Liabilities that companies have been trying to resolve for a period of time get increasingly expensive because people favor the insurance company less and the plaintiff more. The cost of settling those claims becomes more expensive than the analysis that was done when they priced those risks.”
Natural catastrophes are another factor Marra warns about that could drive 2020 M&A trends. “2019 ended up not being nearly as bad as 2017 or 2018 between the flooding and the wildfires, but there’s a whole new awareness of exposures. Is global warming real? Is climate change real? How do companies think about coverages they’re going to place, in what areas, and how are they going to price it?”
Although this decade may not bring Star Trek levels of technology, Long Duration Targeted Improvement (LDTI)—a new accounting standard—will likely force reactions and drive some exits.
LDTI introduces fundamental changes to U.S. GAAP calculations and vastly increases the amount of information needed for required disclosures, which means many insurers will need to modernize their data management, systems and processes.
Currently, the implementation date for larger Securities and Exchange Commission (SEC) filers is 2022, with all others in 2024, according to Fidelity Information Services (FIS). “People are waiting to see if that’s going to have companies re-evaluate their commitment to and focus on certain lines of business, particularly runoff blocks,” Marra says. “The anticipation is that it’s going to lead to a lot of volatility in reporting, particularly if you’re a public company.”
AnneMarie McPherson is IA assistant editor.