Deloitte has presented new trends in insurance mergers and acquisitions for 2024-2025, focusing on how economic, regulatory, and strategic factors might shape the future insurance sector.
Banking woes and rising interest rates accompanied a dip in insurance mergers and acquisitions last year. But as interest rates settle and sellers make peace with the passing of pandemic-era valuations, some of the variability around valuations seems poised to stabilize, encouraging an uptick in transaction interest.
M&A in life insurance and annuity market
A slowdown in life insurance and annuity premium sales, paired with a premium outflow issue, means insurers should think about how they reposition themselves.
Insurance companies may increasingly shift from life and annuity (L&A) products to investment and wealth management services.
Public insurers could opt for divestitures to mitigate the financial impact of new “long-duration targeted improvements” accounting standards. These standards affect the accounting of long-term insurance contracts.
By divesting parts of their business, companies can better manage their finances under the new regulations.
This trend could create opportunities for other entities to acquire these insurance business segments at lower prices, potentially yielding significant economic returns or enhancing market presence.
Some L&A companies have been offering pension buyouts or pension risk transfers, assuming the longevity risk of other firms’ defined benefit pension plans. The resulting asset mix might make these insurers more attractive acquisition targets.
M&A in P&C insurance market
Turning to the property and casualty (P&C) insurance market, property catastrophe rates have been going up.
Some insurance companies may seek scale in the reinsurance market, while others might capitalize on the high-interest rate environment. Additionally, some may choose to exit the market altogether.
This trend raises concerns, especially if climate-related perils intensify and become more frequent, potentially leading to increased capital requirements for property and casualty (P&C) insurers from regulators.
Regulatory pressure could drive further consolidation within the industry, as insurers aim to strengthen their balance sheets and strategically determine their future business operations, adapting to rising risks and financial demands.
Private equity investors looking for new opportunities
As the broader market pulls away from certain risk classes, expect some carriers with creative, flexible solutions tailored to specific risk profiles. This may draw interest from private equity investors looking for opportunities that are capital light and bring less risk than traditional lines.
Private equity firms are looking at investing in some of the Asia players around the region, at all stages of development, with prospective capital providers fairly evenly split between international PE firms and regional asset managers
According to Insurance M&A Deals Outlook, in the face of stark economic pressures – inflation, rising energy costs, and looming recession – insurers remain focused on growth opportunities. The volume of M&A in the global insurance industry reached its highest rate of growth for ten years, up 9.5% in 2023.
Global private equity and venture capital deal value grew in the first quarter, although the volume of transactions declined from the same period in 2023. Deal value climbed 5.1% to $130.61 billion for the first three months of 2024 from $124.30 billion for the same period in 2023.
The number of deals slid 12.8% year over year to 2,880 as of quarter-end, according to S&P Global Market Intelligence.
A number of factors are driving deals. Private equity (PE) firms and asset managers are still keen to explore either entry into the insurance market or expansion of existing footprints.
Flagging insurtech valuations mean acquisitions are increasingly attractive to both PE investors and traditional carriers seeking to increase technological capabilities.
And rising interest rates promise better investment returns for long duration businesses, while helping insurers to rebalance portfolios (see 11 Types of Merger & Acquisition).
The insurance brokerage market
The insurance brokerage market is likely to remain fiercely competitive, with private equity firms and corporate buyers actively vying for acquisitions.
Expect the market to stay competitive as private equity goes head-to-head with corporate buyers looking to grow through M&A with brokerages in the middle market.
Many private equity investors will likely continue to aggregate smaller brokerages. Large brokerage houses will likely continue to see where they can consolidate and expand their footprint in the middle market.
While the Beinsure Media survey focuses on the carrier space, it is worth noting that there is also significant M&A activity in insurance distribution, with PE interest driving an increase in broker consolidation and expansion, across the US, Europe, MEA and Australia (see 4 stages of M&A deals).
With insurers typically balance sheet-heavy at present, the break in carrier M&A activity is likely to be over.
Meanwhile, private equity capital is returning to the market for broker deals.
- Completed insurance carrier M&A worldwide down 17%
- Americas see 24% decrease in deal volume, Europe down 22%, APAC dips 9%
- Appetite for insurtech and changing regulatory landscape key future deal drivers
- Transactions expected to bounce back in coming months
Upcoming changes in regulations will reshape the insurance M&A
Upcoming changes in regulations and economic optimism could significantly reshape the landscape for mergers and acquisitions (M&A) in the insurance industry in 2024. Regulation activities brakes on insurance M&A activity.
If proposed federal standards for fiduciary advice are adopted this year, life insurance companies may be encouraged to revisit the value of an independent sales force that can give advice across a range of products.
While regulatory enforcement activities are putting the brakes on some insurance activity due to the increased cost of doing business, new legislation in other territories is helping to drive business opportunities.
Hong Kong’s new risk-based capital regime for insurers will come into force in 2024, which could lead to a spate of transactions as those who struggle to comply look to exit certain lines of business.
And in the Middle East, the growing regulatory burden will force incumbents to adopt international best practice and open up M&A opportunities as the market consolidates further.
According to Clyde&Co Report, while the Middle East & Africa (MEA) region has seen significant growth, the global trend has largely been driven by the much larger US market, which has seen a 22% increase in transactions. Activity has dropped back slightly in Europe but held steady in Asia-Pacific.
With the economy looking up, the insurance M&A market is poised for a revival in 2024 as more buyers come off the sidelines.
Either way, investors will likely look for insurers to get back to a narrative of growth, with innovation and competitive differentiation increasingly important in achieving that goal.
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AUTHORS: Barry Chen – Principal at Deloitte Consulting, Mark Purowitz – Principal at Deloitte Consulting
