The future of insurance tax after COVID-19: Deals outlook
M&A is a key component of many recovery plans. The insurance sector has been a popular investment target. There is a lot of interest in deals, particularly in the nonlife run off space and life insurance consolidation area. Insurance groups must be ready to protect their value and explore all available opportunities. It could be a good time to examine whether InsurTechs or new entrants might help fill the gaps in products and services that the pandemic exposed.
No matter what the motivation is, there are key tax areas that you need to be aware of in order to maximize the deal’s value.
Deals that include key tax areas
Management of capital
Senior stakeholders and investors should continue to concentrate on tax efficient capital use within a group. If a business is inefficient, it may be sold or ceased altogether. Tax teams have a tremendous opportunity to increase their value by reviewing existing capital structures, and proactive managing tax exposures.
Hybrid debt instruments, which are not limited to traditional reinsurance, may offer alternative sources of capital. These debt instruments can be used to generate tax-deductible interest expense and regulatory capital. This increases capital efficiency. These instruments are tax treated in a complex manner and have recently been subject to changes. It is important that you take care to ensure they provide capital benefits and avoid tax inefficiencies.
Capital optimization is something that tax teams should be looking at, e.g. Reduce solvency capital requirements through the use of the loss absorbing capacity deferred tax (“LACDT”), which is currently subject to PRA approval for standard-formula firms. Although regulatory approval is required, the potential upside may be available if the acquisition is approved. Insurers have been historically conservative in testing the availability LACDT.
Value preservation: tax attributes
It is important to ensure that tax attributes such as historical losses and tax credits, remain available after a deal. It is crucial to ensure that tax attributes, e.g. historical losses or tax credits, are available after a deal. Since 2017, the loss rules have become more complicated. The risk of losing the use of carried forward losses after a change of ownership may be increased by the addition of the “major changes in scale” test, and the extension to the “major changes in nature or conduct trade” test. Due to the possibility of further changes in response COVID-19, it is crucial that you do thorough research on tax attributes. The future use of these attributes will determine the tax profile of target companies, as well as how they are likely to increase in losses due to COVID-19 disruption.
Groups that are subject to M&A activity should review their existing attributes in order to be strong defended during valuation discussions with potential acquirers.
Long-term strategy support: Looking ahead
Additional opportunities exist after acquisition. Cash flow benefits can be realized by exploring more efficient tax grouping and VAT recovery. There are also opportunities to use data strategically with InsurTech and digitalization. Potential R&D expenditure credit claims that could be made, which can be particularly appealing when it comes to managing ETR.
Deals can be made more valuable by tax teams that are proactive in identifying and quantifying potential opportunities. This is how they drive their involvement throughout the deal cycle.
The key takeaways
Tax plays a vital role in all aspects of deals. This includes the protection and enhancement of value from potential disposals, as well as the identification of post-deal opportunities. Engaging with the opportunity and making sure tax considerations are on your agenda will ensure that investors, from existing corporations to new entrants, have a tax-efficient and solid investment case.