M&A 2018 Outlook: Why Advisors Should Care

The aggregate value of U.S. insurance deals fell 30 percent to $20.2 billion in 2017 compared to 2016 and deals in 2018 will be comprised primarily of smaller transactions valued at less than $2 billion, a new report found.

Even so, companies looking to buy or sell need to address several trends that will influence their ability to execute their plans, said Boris Lukan, principal at Deloitte and co-author of a 2018 M&A insurance outlook report.

We sum up some of the key trends and asked Lukan how those trends might affect the retail financial advisor.

Tax Reform

The report: Tax reform has affected the industry in many ways, with insurance companies and advisors specifically affected.

Tax changes afford advisors some relief by lowering rates on pass-through entitles and individuals, and by modifying deductions, credits and incentives.

Tax changes at the corporate level reduce rates from 35 percent to 21 percent, and alter life insurance reserving methodologies and policy acquisition costs.

Why and how it affects advisors: Lower tax rates make the U.S. market more attractive to foreign buyers.

Japanese insurance companies have already looked at and been active in the U.S., and a lower tax rate would give them even more reason to hunt for deals.

With the valuation of European companies on the rise and the falling U.S. dollar, would-be acquirers have more muscle to make acquisition, and that gives retail advisors more options when it comes to doing business with insurance companies, he said.

Lower rates helps level the playing field between U.S. insurance companies and foreign rivals since a higher rate makes U.S. companies less attractive to acquirers.

Lower tax rates free up money for insurers and brokers to buy back the stock, boost dividends, pay one-time bonus increases and strengthen operations.

If insurers and brokers want to stay at the leading edge of the industry, tax reform raises the chances for these companies to make investments that benefit distribution channels and advisors.

Modularization of the Value Chain

The report: The life and annuity industry is a slow-growth proposition and company managers need to hunt for higher returns by rethinking business models by rearranging like Lego blocks distribution, underwriting or customer service components of their companies.

Why and how it affects advisors: Advisors play a key role in distributing insurance products but there are times when the policies are developed by other companies. Those products are sold under and managed by a major life and annuity brand company.

Selling off or moving around pieces of a company affects policy terms, pricing and underwriting criteria, all of which could lead to operational changes to the advisor’s back office, Lukan said.

“Recent M&A activity definitely demonstrates that companies are coming to a realization that value is different and depending on the organization’s competency, they may be better off focusing on certain elements of a value chain rather than offering a soup-to-nuts approach,” he said.

While that’s not necessarily new, “technology is advancing to the point where you can focus on a portion of the value chain in a way to be more streamlined,” he said.

“That's the part that's different and we will see more of this type of deal,” Lukan said.

InsurTech: Buy, Invest or Partner?

The report: Some technology deals will come in the form of an outright purchase, such as American Family Insurance’s acquisition of data and analytics software company Networked Insights. Other deals will consist of an insurance company or broker taking majority stakes in start-ups.

Either way, technology serves as an essential tool to remaining profitable at a time when interest rates are still low, profit margins thinner than they used to be and advisor commissions continue to drop.

For life insurers and distributors, the way to lower high fixed distribution costs is through the use of technology.

How it affects advisors: Main Street retail advisors have already undergone disruption thanks to challenges coming from direct distribution, and start-ups and technology incubators are pumping out internet-based tools to help advisors at a quickening pace.

While that’s not exactly new either, “what might be different is just how much money is being deployed into innovative technologies,” Lukan said.

From straight-through-processing techniques to robotics, from artificial intelligence to analytics, from agent portals to digital distribution, CIOs at every life and annuity company have talked about using these technologies to move their companies forward.

Agents and advisors privileged enough to partake in the discussions should make their voices heard, Lukan said.

Competing life insurers aren’t standing still and advisors should be on the lookout for competitors with more efficient distribution networks capable of binding policies in seconds and cross-selling products more efficiently, he said.

Noncore Divestitures/Valuations

The report: Years ago, when many advisors may have joined the industry, insurers sought to grow by casting a wider net building and acquiring capabilities to amass large product or geographic footprints in the mold of a full-service financial institution.

Tougher competition, tighter regulation and higher customer expectations have changed and insurers are placing bets on what they do best and selling off the rest.

Voya Financial’s decision to sell its annuity portfolio to concentrate on asset management and benefits is but one example.

Acquisitions have been a key growth strategy for many years but the arrival of aggressive private equity acquirers into the industry has sharpened the focus on the bottom line.

Why it matters to advisors: In the last 18 months, insurers of all stripes have seen an “unusually large” number of changes at the top in the C-suite.

C-suite changes often signal a change in direction at the company and a review of the product, company acquisitions or investment portfolio.

That affects advisors because it could have an impact on who they do business with and may force the advisor to decide whether they want to continue with their carrier relationships, Lukan said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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