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Re/insurers could see a new wave of mergers and acquisition (M&A) activity as the industry feeds off renewed vigour after Covid-19 – and as new trends emerge around renewables and geographic markets. This could mean more investment cash freed up as larger companies emerge.
“2023 has gotten off to a subdued start compared the deal activity
levels seen over the past two years.”
In a new report from Re/insurance broker BMS, the world’s M&A activity has been classed as healthy and could see a new swing into action as it defies macroeconomic conditions. “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.
“However, momentum is growing, and we have not seen a decrease in enquiries from companies eager to obtain M&A insurance,” he added. “With market conditions expected to stabilise, we should see a resurgence in deal activity by the end of Q2 and into the second half of 2023.”
S&P Global noted last year that despite earlier acquisitions made by Berkshire Hathaway, “insurance deal activity slowed significantly in 2022”, according to its Global Market Intelligence analysis.
“While 2021 was a particularly active year for insurance broker deals, with 1,150 announced over the course of the year, 2022 saw much lower activity with 685 through the end of November — the lowest volume since 2019,” it said.
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 has 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 report.
“Growing appetite remains in the M&A insurance market, with a circa 40%
growth in insurance products purchased over the past 24 months.”
BMS noted that much of the resurgent M&A activity was driven by private equity capital. “Private equity and corporates continue to find opportunities,” the report said. “Whilst deal volumes have fallen compared to the high levels achieved in 2021 and early 2022, [we] remain optimistic that M&A will bounce back towards the latter half of 2023.”
The report specified that despite a challenging macroeconomic environment, the M&A market for insurers in 2022 came close to matching the volume of 2021’s.
“Growing appetite remains in the M&A insurance market, with a circa 40% growth in insurance products purchased over the past 24 months,” said BMS. “Deal size in 2022 was affected by the deceleration in M&A activity coupled with a rise in interest rates, with insurers noticing a reduction in average enterprise value as investors are less able to commit to high deal multiples.”
M&A has long been associated with re/insurers and the industry.
Fitch Ratings noted that it was likely to continue this way due to the capital injection benefits it typically offered. “For traditional reinsurers, opportunities to increase pricing and improve profitability could develop if rising interest rates lead to lower supply of alternative capital to the reinsurance market, most of which is through insurance-linked securities (ILS),” the company said last year.
“In more recent years, ILS investors have pulled back from the market
following several years of above-average catastrophe losses."
It added that persistently low interest rates after the global financial crisis had drawn many new investors to the reinsurance market in search of better returns compared to poorly performing financial markets. “In more recent years, ILS investors have pulled back from the market following several years of above-average catastrophe losses. A continuation of this trend could help to extend the hardening market and would clearly be positive for traditional reinsurers’ profitability,” it said.
This meant that insurers would continue to see the effects of this trend, which could enable them to invest more once capital injections from M&As come through.
BMS’s report said there was an uptick in claims from policies underwritten during the pre-2022 M&A boom. This, in turn, has resulted in “reinsurers looking to manage risk to a much greater degree, accounting for lower primary policy limits and an increase in excess policies as a proportion of an insurer’s book.”
The analysis also noted that there was no notable rise in distressed M&A targets, with the short-term macroeconomic impact of Covid-19 largely tapering off in 2022. “However, a potential global recession in 2023 is expected to increase quantity of distressed sales,” it said.
Several new areas of M&A interest have also become apparent post pandemic. These include the renewables and infrastructure sectors, which BMS said had proven “resilient”, and saw an increase in deal volume of 8.7% in 2022 compared to 2021.
“Although European M&A activity tailed off in the latter half of 2022, the tax insurance market saw a record number of enquiries,” said BMS. “Secondaries market remained active in 2022, with total transaction volume exceeding $100 billion for the second year running.”
2023’s resurgent M&A activity arrives despite 2022 seeing decade-highs in inflation and countermeasure interest rate.
“The number of insolvencies in Q3 2022 increased by 40% year-on-year
compared to Q3 2021."
“The impact has been that equities and bond markets have lost more than $30 trillion in value in 2022, with the rise in interest rates having a significant impact on balance sheets, capital investments, M&A as well as the day-to-day cost of refinancing,” said BMS.
These conditions mean more insolvencies, which could indicate an increased potential for cheap deals. “The number of insolvencies in Q3 2022 increased by 40% year-on-year compared to Q3 2021, as businesses weather increasingly challenging economic conditions,” the report also said. “There were 5,595 company insolvencies in Q3 2022."
Ongoing economic uncertainty could see more opportunities for easy acquisitions as companies experiences additional financial difficulties.
BMS listed areas including southern Europe – notably Spain – as key for M&A activity in the coming year.
“We expect to see solid M&A activity in Spain, especially from H2 onwards,” BMS said, citing international interest as the main cause. “This will be accompanied by the exponential trend of using M&A insurance solutions in Spain, which are particularly useful and advantageous in uncertain circumstances such as the one we are currently facing. This was the case back in the aftermath of the 2008/2009 recession.”
Co-Head of Acquinex for Southern Europe, Jaume Benajiba, stated that “the market is picking up quicker than we expected as we are told by private equities and investment funds that given that acquisition costs and financing conditions are not improving funds have cash and are deciding not to postpone anymore their investments”.
He also highlighted a massive increase in renewable deals across Southern Europe – both for operational portfolios and renewable assets under development.
For insurance investors, this means possible new markets to invest in, as well as new companies looking for a cash injection.
