5 minute read 18 Jun 2018
fish swimming sea

How M&A can build and shape digital ecosystems for insurers

By

David Lambert

EY Global Insurance Transactions Leader

Helping clients to assess the merits of investing into, or divesting of, companies in the insurance sector.

5 minute read 18 Jun 2018

New forms of M&A are evolving many deals from exercises in optimization to strategies for transformation.

The Insurance sector, like so many sectors, is going through a period of clear and rapid transformation. Indeed, the industry is facing up to the reality that its products, customer engagement and overall propositions need to change radically while operations and costs need to be fundamentally streamlined.

Indeed, sector transformation drove M&A activity in 2017, and we expect that transformational deal activity will continue through 2018 and beyond.

Private Equity (PE) a key participant as the sector transforms

PE investors are participating in the overall transformation of the insurance sector with ever-increasing sophistication and confidence. A number of large PE houses are at the forefront of the market solutions to legacy risk — Closed Life and Non-Life run-off — and we note a series of very large transactions in North America, Europe and elsewhere.

While Insurtech is largely perceived as a space for venture capital rather than PE, generalizations are risky. PE investment will be a key part of the monetization of new technologies.
David Lambert
EY Global Insurance Transactions Leader

We also see PE activity across many other areas of insurance, including participating in the extensive consolidation and reshaping of distribution businesses, which are themselves fundamentally affected by technology changes.

“While Insurtech is largely perceived as a space for venture capital rather than PE, generalizations are risky,” says David Lambert, EY Global Insurance Transactions Leader. “PE investment will be a key part of the monetization of new technologies.”

PE houses are looking to invest into current IT service providers, with a view to helping them to significantly enhance their propositions, and will also be looking to acquire new disruptive businesses as they start to prove their ability to scale and generate cash flows.

Tax reform as a catalyst for M&A

US reform is a great example of how tax law changes can stimulate (or nullify) the deal market. The US rule changes are wide ranging. Changes such as the reduction in headline rate will make the US a more attractive place to invest.

Tax is never, and should never be, the driver for a deal. But we are now seeing a few transactions where US tax reform is cited as a contributing factor.
Jeff Soar
EY Global Insurance Tax Leader

The ability for US companies to repatriate previously trapped offshore profits will put more acquisition funding into the market. And changes to the way a US company interacts with its foreign subsidiaries should stimulate US investment overseas.

On the flip side, the changes to some of the rules around investments in what appear to be “passive” companies may limit investor choices and the US base erosion anti-avoidance rules could make cross-border trade and capital provision uneconomic. “Tax is never, and should never be, the driver for a deal,” says Jeff Soar, EY Global Insurance Tax Leader. “But we are now seeing a few transactions where US tax reform is cited as a contributing factor. I suspect we will see many more.”

The challenge of Insurtech

Insurtechs continue to move from proof-of-concept to proof-of-scalability, demonstrating the ability to achieve scale across multiple insurance lines, components of the insurance value chain and geographies. Emerging winners will be the target of M&A interest from a range of potential investor types (including incumbent insurers, large technology companies, and institutional and retail investors).

The challenge is to avoid the erosion of innovation value post acquisition, to achieve an infusion of innovation into the mature parent without stifling the smaller entity.
Dustin Ball
EY Asia-Pacific Insurance Transactions Leader

Investment in Insurtech disruptions (such as sensors, AI, wearables, analytics) will increasingly be a medium to build and access emerging consumer-centric digital ecosystems. This will in turn accelerate convergence through business partnerships between innovative companies in very different sectors.

We have seen continuing investment into emerging Insurtech businesses, often via venture fund structures established by major insurers. The use of dedicated venture funds helps address the challenges insurers face when investing into (and partnering with) emerging and startup businesses:

  • The investment approach to innovative companies requires very different skills to traditional M&A by major institutions.
  • Funds can apply metrics that may be very different from classic return-on-equity models, recognizing the strategic value of an investment as opposed to the short-term financial return.
  • Venture funds can apply different investment structures. Many Insurtechs do not want to be fully acquired by a single financial institution, as that would limit the number of industry counterparties with which they can interact. Insurers can use venture funds to take strategic stakes in these innovative companies.

Investing within digital ecosystems

Insurance business models are changing through the use of technology and the fundamental redesign of traditional value chains. Insurers are grappling with how to enter into new types of partnership arrangements, often within the context of newly developing, digitally-connected business ecosystems. Participating in digitally-connected ecosystem “partnerships,” whether contractual or not, requires very different behaviors and commercial approaches.

Success will depend upon the insurers’ ability to combine new and innovative skills and approaches with the deep sector experience and skill sets that exist in their organizations.
Shaun Crawford
EY Global Insurance Leader

To create effective partnership models within digital ecosystems and navigate M&A, insurers must ask several questions:

  • Do we acquire capabilities across the ecosystem to increase our customer access and relevance?
  • How do we develop capabilities to effectively acquire and manage businesses that are far outside the typical core competence of an insurer?
  • How do we assess (and monetize) the key assets in our business? For example, is our customer data of critical value to other participants in the ecosystem?
  • Do we need to invest to secure a longer term role in this ecosystem? This might include a combination of partnership arrangements or JVs with other participants, or extensive acquisition of participants in order to “control” the ecosystem (if that is possible).

Do we create new, less traditional and potentially less permanent business structures to operate in multiple digital ecosystems?

Summary

Transformational deal activity in insurance will continue through 2018 and beyond, with private equity as a key participant, tax reform as significant catalyst and Insurtech as a locus of activity.

About this article

By

David Lambert

EY Global Insurance Transactions Leader

Helping clients to assess the merits of investing into, or divesting of, companies in the insurance sector.