Insurance M&A, tax and ESG to drive deals in H2 – report

Dealmaking in the second half of this year will be marked by more acquisitions in the insurance sector and increased dealflow resulting from tax changes in the US, according to a report from PwC.

Acquisitions of insurance products including annuities, life insurance and long-term care insurance is heating up because of two main drivers: higher returns and a stable source of permanent capital, the report Private Equity Deals Insights: 2021 Midyear Outlook, noted.

“First, private equity managers can generate higher risk-adjusted returns on assets, helping insurers generate additional spread and higher return on equity. Second, they increase AUM, generate additional fee income and provide a source of permanent capital through access to the insurance company’s balance sheet,” according to the report.

“While the trend initially began with listed funds, we have seen a number of the non-listed funds follow as an asset aggregation or enhanced yield play,” Manoj Mahenthiran, a private equity deals partner at PwC told Private Equity International.

He added that these insurance platform investments tend to involve leveraging a combination of the manager’s balance sheet, credit and hybrid value funds and some LP investments.

Carlyle Group, for example, wants to expand its insurance solutions business as part of its strategic plan via its $2.2 billion acquisition of re-insurer Fortitude Group Holdings, which it acquired from AIG last year. KKR in February completed its $4.7 billion acquisition of Global Atlantic, which resulted in a 77 percent growth in its AUM as of end-March to $367 billion.

PwC noted in the report that increased deal activity in late 2020 will continue through 2021. PE deal volume increased 21.9 percent to a total of 2,346 deals from January to May this year, compared with the same period last year.

Uncertainty around tax reform in the US is also expected to drive more deal activity, as “PE funds and founders look to lock in gains prior to any increases in capital gains taxes”.

Potential tax changes under US President Biden’s Build Back Better plan include raising levies on capital gains and ordinary income, and increased tax audits for those earning more than $400,000 a year. The proposed individual income tax rate could increase to 39.6 percent from 37 percent. The capital gains rate could also increase from 20 percent to 39.6 percent for taxpayers with income over $1 million.

Deals are also set to be intensely scrutinised to mitigate ESG risks. A focus on sustainability and net zero is emerging as a priority for PE firms, according to another survey from PwC. More than one-third of investors now consider climate risk at the due diligence stage to understand and mitigate the exposure of portfolios, the report noted.

Mahenthiran also noted that a sustained inflationary environment will impact dealflow. “The low interest environment is an important contributor to expanding multiples – inflation and higher interest rates will definitely impact deal multiples and potentially slow down deal activity,” he said.

The industry’s biggest firms including Blackstone, EQT and Bain Capital have all noted the importance of the pricing power of the businesses they buy in mitigating rising costs, as PEI reported.