InsurTech investment increases in Q2 2017 as reinsurers wise up to opportunities

BY Fraser Tennant

Global investment in InsurTech rose sharply in Q2 2017 as reinsurers become more open to its potential for transformation rather than disruption, according to a report out this week.

In ‘InsurTech – the new normal for (re)insurance’, PwC notes that investment in InsurTech by global insurers, reinsurers and venture capital firms surged by 247 percent to $985m, compared to Q2 2016 ($398m). The first three months of 2017 saw $283m of InsurTech funding.

Furthermore, the report predicts the rate of funding and investment will continue at a similar level and highlights an uptick in interest in InsurTech from the reinsurance industry as sentiment turns from fear to bullishness, and from scepticism to collaboration.

“A change has happened in insurance and it is hugely encouraging to see both insurers and reinsurers increasingly view InsurTech as an enabler rather than a competitor,” said Patrick Maeder, EMEA insurance consulting leader at PwC. “This uptick in enthusiasm is vital to ensure the industry engages with innovators to help shape its own success. Neither party can survive this wave of disruption on its own and collaboration between experienced industry players and new ideas and technology will result in new products, reduced costs and more engaged customers.”

Although 82 percent of reinsurance companies say they plan to partner with InsurTechs, including a new wave of start-ups, to explore how new technologies and talent groups can help them play a leading role in transforming their industry, concern about disruption and loss of market share remains. “InsurTech innovators have rapidly established themselves as the backbone of innovation in this industry but reinsurers should not be overly concerned about startups directly disrupting their product offerings,” continues Mr Maeder. “They should instead focus on what makes their business unique and where they see future growth coming from.”

The report also notes that startups are focused less on disrupting the entire industry and more on redesigning specific areas of the value chain, which provides reinsurers with an opportunity to foster a culture of collaboration, embrace the innovative potential within their businesses and ultimately modernise the industry.

Mr Maeder concluded: “Reinsurers then need to find the best way of directly working with this new wealth of tech-savvy talent to place themselves at the heart of what will undoubtedly be a transformation for their business and the wider industry.”

Report: ‘InsurTech – the new normal for (re)insurance’

Tough time ahead for financial services

BY Richard Summerfield

As higher inflation impacts UK households, and as a decline in real wage growth continues to take hold, the financial services sector is in line for a tough 2018, according to the latest EY Item Club Outlook for Financial Services.

The report notes that inflation will peak at around 3 percent in the second half of the year, while real household disposable incomes are forecast to decline by 0.2 percent in 2017 - the first drop since 2013. This fall in household income is likely to decrease the demand for mortgages and other 'big ticket' items and general insurance in 2018.

The combination of higher inflation and decreased real earnings will likely lead to an increase in consumer credit next year, as households look to compensate for any shortfall with increased borrowing. The amount of consumer loans will grow from £204bn in 2017 to £206bn in 2018 before rising to £212bn in 2019 and £218bn in 2020, according to the report.

EY UK financial services managing partner Omar Ali said: "Even modelling for a Brexit transitional deal, the outlook for 2018 remains tough for financial services as the impact of higher inflation is felt by households up and down the country. Business lending, mortgage lending and general insurance look set to be the hardest hit. Despite warnings from the Bank of England and some high-street lenders, the only type of lending that is expected to grow in 2018 is consumer credit."

Indeed, the pressures applied to consumer spending in 2018 could dramatically affect the UK’s short term economic prospects. With consumer spending accounting for 60 percent of the UK’s GDP, any significant reduction in consumer spending could have a knock on effort on GDP. With pay growth expected to remain subdued in the short term at least, real earnings are expected to fall by 0.5 percent this year.

The report predicts business lending will rise to £435bn by 2020, but only if the UK is able to strike a transitional deal during Brexit negotiations with the EU. Mortgage lending, however, will fall to £1.1 trillion in 2018, compared to a forecast £1.2trillion in 2017, though it is expected to climb slightly in 2019 and 2020.

Report: EY ITEM Club Outlook for Financial Services

Biotech struggles continue despite attracting finance

BY Richard Summerfield

The global biotech industry has seen continued investment in new treatments despite experiencing a number of strong headwinds, such as a pull back from capital markets in the US and the EU, lower valuations and increased pressure from payers, according to the 31st annual EY report 'Beyond Borders: Staying the Course'.

The report notes that revenue for US and Europe-based biotech companies reached $139.4bn in 2016, an increase of just 7 percent on 2015. Furthermore, net income dropped 52 percent year-over-year to 7.9bn and financing dropped 27 percent to $51.1bn in 2016 – the first decline in four years.

Regardless of these struggles, early biotech financing has remained promising, investment in seed and series A biotech venture rounds totalled $3.6bn in 2016, a record 36 percent of the $10bn of venture capital raised. This figure is higher than the previous 15-year average of $1.3bn. In 2016, IPOs in the biotech space endured a difficult period, however.

Dealmaking remained active in 2016, with acquirers taking advantage of reduced biotech valuations. Mega deals also played a key role: five biopharma mega deals accounted for three-quarters of all M&A value in the industry in 2016. As a result average M&A value for deals with announced terms was more than $1bn for only the third time in the past decade. Overall, 2016 deal activity was down 12 percent year-on-year to 79 deals, however, M&A volume remained above the past decade’s average of 65.

Research and development (R&D) spending reached a record high of $45.7bn, up 12 percent on 2015. Pamela Spence, EY global life sciences leader, said "The biotech industry's financial commitment to R&D, while impressive, needs to be coupled with efficiency improvements to achieve better returns and ultimately to drive greater affordability of its products. With pricing pressures expected to escalate, firms will need to incorporate new digital and artificial intelligence technologies into their traditional drug target selection and overall R&D processes to achieve those returns or risk being outdone by firms that do. Furthermore, the payer-driven slowdown in revenue growth industry-wide provides further evidence of the need for companies to accelerate their shift in business models to fee-for-value from fee-for-service. Fundamental to the success of this transformation will be to form data-focused partnerships with the digital technology companies increasingly entering the health care space."

According to EY, the US is the “biggest source of innovation” in the R&D field, though China and the UK are also making impressive strides.

Report: Beyond Borders: Staying the Course

Dodd-Frank dead?

BY Richard Summerfield

Since the financial crisis, banks and other financial institutions have grown accustomed in increased regulatory oversight and scrutiny. However, following calls from president Trump to overhaul the regulatory regime established under former president Obama, the US Treasury Department this week announced a wide ranging plan designed to remake the country's financial regulatory framework.

The nearly 150-page report produced by the Treasury has recommended more than 100 changes, most of which would be made through regulators rather than Congress. The most notable proposal concerned the easing of restrictions big banks now face in their trading operations, lightening the annual stress tests they must undergo and reducing the powers of the Consumer Financial Protection Bureau (CFPB) which has been has been aggressively pursuing financial institutions over their malfeasance.

Regarding the proposed changes, Treasury Secretary Steven Mnuchin said, “We were very focused on, what we can do by executive order and through regulators. We think about 80 percent of the substance in the report can be accomplished by regulatory changes, and about 20 percent by legislation."

The new plan would greatly expand the authority of the Financial Stability Oversight Council, as well as change the way global capital standards are implemented to help US banks compete with overseas rivals. Smaller banks will also stand to benefit from the new plan; those banks with less than $50bn in assets would be less constrained than their larger rivals who would be subject to greater – though reduced – regulatory oversight.

These changes, should they win approval, would be welcomed on Wall Street and by many financial institutions which have long complained that the existing regulatory framework was too overbearing. The promise of lighter capital and liquidity standards and reduced supervision has already helped boost shares of Goldman Sachs and Morgan Stanley.

Away from the US, the Treasury’s report was also critical of international standard-setting bodies including the Basel Committee on Banking Supervision and the Financial Stability Board, noting the bodies had “overlapping objectives” and displayed a lack of transparency in their deliberations.

One of the key tenets of President Trump’s election campaign was the reduction of regulatory oversight in a number of key areas, including financial services. With the publication of the Treasury’s recommendations, the beginning of the end of the Dodd-Frank Act may have begun.

News: U.S. Treasury unveils financial reforms, critics attack

Toshiba invests $3.68bn to complete troubled US nuclear project

BY Fraser Tennant

Providing a much needed injection of capital into the beleaguered US nuclear industry, Toshiba Corporation has announced its intention to pay $3.68bn toward the continued building of two nuclear power plants in the US state of Georgia.

The payment, an agreement between the Japanese conglomerate and Georgia Power (a subsidiary of energy provider Southern Company, will allow for the completion of the Vogtle project – two nuclear reactors known as Vogtle Units 3 and 4 that were originally under construction by Toshiba’s nuclear unit Westinghouse Electric Company (WEC) in 2013.

However, the future of the reactors had been thrown in doubt after WEC filed for Chapter 11 bankruptcy in March 2017 following difficulties with a number of key projects that cost the nuclear unit billions. As a result of the bankruptcy, project management of the Vogtle nuclear power plant project was assumed by Georgia Power.

"We are pleased with the positive developments with Toshiba and WEC that allow momentum to continue at the project while we transition project management from WEC to Southern Nuclear and Georgia Power," said Paul Bowers, chairman, president and chief executive of Georgia Power. "We are continuing to work with the project's co-owners to complete our full-scale schedule and cost-to-complete analysis and will work with the Georgia Public Service Commission to determine the best path forward for our customers."

In a statement, Toshiba confirmed that the agreement with Georgia Power would see payments begin in October 2017 and continue to January 2021 when the Vogtle project is scheduled to be completed. Toshiba also confirmed that it had set aside loss reserves for the payment and that this would not have an impact on earnings projections.

Struggling to say afloat financially, Toshiba has also announced its intention to sell a significant stake in its highly-regarded memory chips business – considered to be the crown jewel of its semiconductor business operations – to help cover the billions lost due to the cost overruns overseen by WEC.

Thomas A. Fanning, chairman, president and chief executive of Southern Company, concluded: "We are happy to have Toshiba's cooperation in connection with this agreement which provides a strong foundation for the future of these nuclear power plants.

News: Toshiba to pay $3.7 billion to keep building U.S. reactors