Banking, Finance & Insurance Q3 2020

Q3-2020-Banking-Finance-Insurance

M&A Transaction Trends

Industry Trends

Climate Change Heating Up Regulatory Concerns

With the recent abundance of natural disasters, regulators are pushing insurers to manage better the risk they face from climate change. Severe weather has been fueled by climate change and has caused insurers a record number of insurance payouts ($219 billion in 2017 and 2018). The Department of Financial Services, a regulator of nearly 1,800 insurers, spanning small family-run businesses to large public companies, follows the UK's example. The UK has started to require disclosures from pension funds and large companies about how climate change affects their investments and businesses. The DFS said it would start asking insurers what steps they have taken to examine exposure in 2021.¹

Private Equity Earnout Provisions Hedge Economic Uncertainty

Economic uncertainty driven by the pandemic has resulted in private equity groups increasingly relying on earnout provisions that help narrow pricing gaps with sellers. Compared to the use of earnouts in the past, these provisions currently incorporate extended timeframes, some up to 24 months, and more complicated earnout metrics instead of just revenue and/or EBITDA tests. These provisions have allowed investors to remain active in the marketplace while mitigating the increasing pandemic-related business risks.²

Legacy Driving Deal Rationale

As distressed businesses grapple with the effects of Coronavirus, re/insurers are expected to reassess existing operations and pull out of uneconomic lines, industries, and/or geographies. A focus on core strategy will drive the divestment of teams and books of business that no longer fit its growth strategy. An increasing number of target companies offered for sale is expected in 2021 with an increasing focus on legacy business. Two recently enacted restructuring tools, Insurance Business transfers and Corporate Divisions could increase deal activity in the short-term.³

Open Banking Reinvents Branch Business Model

As banks continue to struggle with branch visits, the rise of open banking technologies may regenerate the banking model and transform branches into unique selling propositions. Shifting branch dynamics and reducing the administrative burden on branch staff increases the ability to service complex customer needs. Enabling open application programming interfaces, banks can focus on customer interaction and elevate banks as community hubs. New technologies will help lower operating costs by reimagining design, staffing, and infrastructure and provide banks with key strategic advantages as they continue to push customer loyalty.⁴

Captive’s Rising Tide

Captive Insurance Programs are on the rise as businesses cope with insurance coverage and premiums in the age of Coronavirus. U.S.-based insurance broker Marsh noted that the number of captive’s established has tripled between January and July compared to the same period last year, with Aon noting similar trends. The acceleration in the use of captives is driven by the attractiveness of establishing a customized program that meets each business's unique needs, further heightened by the pandemic and its impact on market premiums and coverage. The use of captives does not pose an immediate risk to the insurance sector, but the risk of captives broadening their use may impact future industry performance. ⁵

VC Activity Boosts Fintech Demand

Domestic and Global Venture Capital investment firms fill the void of mega-M&A deals in the Fintech market, providing access to capital to growth-stage companies and driving widespread investment. Given that digitization of assets has become a key focus of financial institutions, big tech and platform providers have remained active in this space, expanding their market reach and customer value propositions. In particular, short-term attention will be focused on data analytics for financial services, with capabilities to enhance credit-related solutions. Further, with early stage fintech's struggling to attract continued funding, the industry's consolidation is expected.⁶

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