M&A activity has slowed – what will it mean for investments?

New report says the M&A rate for insurance companies in 2023 dropped off compared to 2022.

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Mergers and acquisitions rates dropped in 2023; what will this trend mean for 2024?

Mergers and acquisitions (M&A) activity in the insurance sector was at a ten-year low in 2023, according to the “Insurance Growth Report 2024” launched this week by law firm Clyde & Co., but Europe managed to gain steam towards the end of the year.

The report said that inflation and the movements by central banks on interest rates to combat rising prices were one of the main reasons for the slowing activity.

It also listed the world’s complex regulatory system – particularly around ESG and climate reporting – as being part of the reason for the slowdown. This was namely down to insurer’s nerves around potential compliance pitfalls.

What’s happening in the market?

The report said that despite a year-on-year plunge in M&A activity across all regions, there was a 23% uplift in deals in Europe from H1 to H2, which could indicate a returning appetite for acquisitions in the region. Europe’s economy was largely flat for most of last year, with many major markets hovering in recessionary conditions.

Because of this, the tight margins in business lines were largely driving consolidation higher as companies looked to increase profit margins through scale and diversification.

This trend reverses what was seen in 2022 when the re/insurance space ramped up its M&A activity due to new trends emerging after the pandemic.

In April last year, a report from re/insurance broker BMS said that the world’s M&A activity had been classed as healthy and could see a new swing into action as it defied macroeconomic conditions – a prediction that proved incorrect. “2023 has gotten off to a subdued start compared the deal activity levels seen over the past two years,” said Tan Pawar, Head of Private Equity and M&A at BMS. The subdued start actually continued but did show more shoots toward the end, which could bode well for 2024.

Over the past decade, insurers have been setting a pace in M&A activity with multi-billion-pound deals. Some of the largest include PartnerRe purchasing Covéa for $9.3 billion and Marsh McLennan’s $5.6 billion acquisition of JLT.

The M&A landscape had been impacted by various macroeconomic developments, including the Covid-19 pandemic, the war in Ukraine, concerns around recession, higher interest rates to curb inflation, and risks associated with the recent banking crisis, said the BMS report. These factors were still apparent last year.

What were the trends in 2023?

The Americas and the Middle East and Africa (MEA) region saw the biggest decline in deal numbers from 2022 to 2023, but while the downward trend continued from H1 to H2 in the latter year, US deals increased slightly in H2.

Globally, the number of deals went from 449 to 346 in 2023, split almost evenly between H1 and H2.

The report also listed the continuing “sticky” inflationary situation as a reason why this trend might continue well into 2024.

“Expectations of central bank interest rate cuts pushed back to later this year in key markets such as the UK, the US and the Eurozone, the cost of borrowing to fund M&A is likely to restrict activity for at least the first half of this year,” it said.

Investment in the Asia-Pacific (APAC) and MEA regions in M&A fell significantly across the year, although the regions were at opposite ends of the scale concerning the year-on-year decline in deal numbers.

"Companies finding it challenging to achieve healthy margins on commercial business
are looking for reliable cash flow in the personal lines space.”

“M&A activity is coming back to the European insurance market, as leading global carriers look to acquire specific business lines – particularly those high volume, but relatively low premium contracts that can be sold as embedded or affinity products. Companies finding it challenging to achieve healthy margins on commercial business are looking for reliable cash flow in the personal lines space,” said Eva-Maria Barbosa, Chair of the Global Corporate & Advisory Group at Clyde & Co.

The various regulatory changes over the year also drove the trends. Many companies did not want to fall foul of certain changes and were, conversely, eager to enter markets that were designated a safer bet due to regulatory movement. The report named the Gulf Cooperation Council (GCC) countries and Australia as key areas to watch in this area.

What does it mean for investment and investors?

The report said that macroeconomic factors will continue to play “a significant role in the insurance sector’s ability to achieve growth in 2024”.

"Continuing high interest rates will also impact the cost of debt funding for acquisitions
and contribute to increased claims costs and higher operational costs.”

“With financial markets potentially looking more volatile this year, growth in carrier’s investment portfolios is by no means certain, despite higher interest rates,” said the report. “Continuing high interest rates will also impact the cost of debt funding for acquisitions and contribute to increased claims costs and higher operational costs.”

If investment portfolio returns narrow, there could be more M&A activity as companies look to shore up profitability.

An aspect of this was also new regulatory enviromements putting stress on capital reserves, which could see more consolidation, such as what has been predicted in Indonesia.

One trend the report focused on was the use of Artificial Intelligence (AI) by insurers as a key development in the market. Companies that were investing in the space were being watched by others in the market for a variety of purposes, including potential takeover possibilities if the strategy was effective.

However, the report said, few companies were willing to commit to significant investment into AI processes for back-office functions or risk before AI solutions had been fully road-tested and regulatory frameworks established in key markets.

This volatility in the market’s fortunes and the amount of M&A showed it to be still in flux. For investors, this means that tight margins might have to be weathered as M&A appetite has slowed. However, the global market is picking up in terms of economic activity more widely, so abilities to find good yield have nevertheless increased.