What are the two most powerful drivers of M&A in 2023?

Analyst shares when the M&A market may recover

What are the two most powerful drivers of M&A in 2023?

Mergers & Acquisitions

By Gia Snape

Dealmakers are approaching insurance mergers and acquisitions (M&As) with cautious optimism, as they pursue promising opportunities amid high economic uncertainty.

Inflation and rising interest rates are the two biggest factors affecting dealmaking this year, according to Deloitte’s 2023 insurance M&A outlook.

While M&A will continue, deals will happen with less frequency and at lower prices compared to previous years.

Barry Chen (pictured), principal – M&A market leader at Deloitte, said that last year’s slowdown has carried over into 2023.

“From 2019 to 2021, we saw an increase in the volume in dealmaking. But in 2022, as we entered a state of hyperinflation, interest rates spiked faster than I think folks anticipated, and it created a lot of uncertainty,” Chen told Insurance Business.

Squeezed by higher interest rates, players tightened their budgets. Many insurers shifted towards margin improvement, focusing on cost and strategic growth while de-prioritizing acquisitions.

Deal volume in the US and Bermuda in 2022 dropped more than 27% compared to the year before, according to Deloitte. Overall deal value tumbled 69% from 2021.

What are the top insurance M&A trends of 2023?

One of the biggest trends is an increase in embedded insurance, which will see insurance companies converging more and more with non-insurance players.

“Insurers are seeing this is an opportunity to expand distribution beyond the traditional model, so that's where some of this convergence is starting to pick up,” said Chen.

“Tesla has been looking at insurance in the auto space for three years now, so that’s nothing new. But we’ve seen more auto players start to inquire about insurance capabilities as well.”

Other trends to note in insurance M&A are:

  • Continuing MGA/MGU/specialty broker demand
  • Persistent rate hardening, particularly in reinsurance and property and casualty (P&C) commercial lines
  • Growth of alternative capital in reinsurance
  • Increased life and annuity (L&A) tactical deals

Insurance brokerages at an advantage

The industry’s most active M&A segment in the past few years has been insurance brokerages, including MGAs, MGUs, and specialty agents.

Despite this, brokerage deal volume dropped by half last year, according to Deloitte. A total of 584 transactions, valued at an aggregate $4.1 billion, occurred in 2022.

That’s compared to 802 deals valued at $10.9 billion the previous year, a drop of 27% in volume and 62% in aggregate value.

However, Chen said insurance brokerages, which traditionally have more access to capital, would be first to pick up M&A again.

“Brokers have been able to buy different distribution or capabilities to create a more holistic experience for their clients. I think they're going to continue to do that and will probably be the more active ones as we start to see the rate stabilized,” he said.

“I think they are either going to pick up for scale, or they're going to buy capabilities. Given where the cost of capital sits today, there's going to be greater demand to see returns on these deals come in faster.

“That means their ability to integrate those capabilities and truly extract value is going to be one of the key drivers of brokerage acquisitions.”

When will insurance M&A recover?

Deloitte’s outlook indicated that when interest rates settle, companies would begin deploying capital for acquisitions.

But while deal volume could bounce back later in the year, Chen warned not to expect as many megadeals of $1 billion or more as the market saw in 2021, when M&A activity peaked.

“We expect the rate hardening to continue a little longer in 2023. I think the market will start to thaw in the back half of the year,” Chen said.

“I think this year, players who have cash and a healthy balance sheet likely have more an advantage. We don't know that [M&As] will ever get back to the 2020-2021 valuations. But it will be interesting to see how that shakes out this year as sellers may think that they deserve more for their book of business.”

Overall, organizations looking to do deals will need to be even more intentional about building a stronger business case, Chen added.

What is your outlook on insurance M&A for 2023? Share your thoughts in the comments.

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