With many insurance companies and financial institutions seeking to sell off non-core insurance businesses at attractive valuations, buyers may be able to expand into new markets through acquisition, according to Deloitte’s "The 2009 Insurance M&A Outlook: Opportunity in an Uncertain Environment."
Deloitte’s report covers the five key situations when insurance M&A is likely to increase, a strategic objectives checklist for insurance M&A, and a four-phased approach to planning and executing insurance M&A.
Deloitte also defines several key factors affecting insurance M&As, including:
• Low valuations. Reflecting weaker balance sheets and lower reserve levels, the valuations of many property-casualty insurers are trading at discounts to book value and, in some cases, at all-time lows.
• Push for International Financial Reporting Standards. A switch to a globally accepted insurance accounting standard could also result in more consistent financial information and valuations.
• Principles-based reserves. The National Association of Insurance Commissioners is expected to adopt the Principles-Based Approach to life reserve and capital requirements, which will require companies to "model all identifiable and material risks, benefits, and guarantees inherent to the product sold." This will have a significant impact on the due diligence associated with M&A transactions by requiring companies to test and understand the reasonableness of the assumptions used in the models.
• Tax issues and legislation. As the tax-reform debate evolves, potential buyers need to determine their best- and worst-case tax scenarios and prepare valuation models accordingly. Potential changes in the tax system and tax rates can have a significant impact on the after-tax cash flows and value of a deal.
To view the full report, visit www.deloitte.com/us/insurance.