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2023 has been a challenging year for businesses across sectors, with insurance being no exception. Climate change has destabilised once easily insurable areas, ongoing wars and conflicts contribute to continuingly rising prices and the possibility of recessions loom over several countries. As a result, M&A took a backseat in H1 of 2023, “squeezed by higher interest rates, [businesses] tightened their budgets. Many insurers shifted towards margin improvement, focusing on cost and strategic growth while de-prioritising acquisitions”(Insurance Business: What are the two most powerful drivers of M&A in 2023?).
Yet, 2024 promises better outcomes for M&A for the insurance sector. Deloitte report, “though industry convergence is slow as companies look to strategically rebalance their portfolios, this trend is not expected to hinder the continued move forward” (Deloitte: 2023 insurance M&A outlook: balancing uncertainty with optimism). Below, we explore several factors impacting M&A activity, and what we can expect to see in 2024.
A focus on convergence and embedded insurance
Insurers looking to offset potential challenges do well to drive strategic partnerships. Convergence between insurers and non-insurance partners creates new streams of income from shared opportunities. An example of this cross-industry insurance trend can be found in tech purchases, where retailers are increasingly offering embedded insurance at point of sale. Deloitte go on to report, “embedded insurance in personal and small commercial lines could exceed $70 billion in premiums in the United States by 2030”(Deloitte: 2023 insurance M&A outlook: balancing uncertainty with optimism). These strategic partnerships strengthen both sides, with the increased cash flows offering more opportunity for mergers.
In a similar strategy, insurance companies continue to look for and attract alternative capital. As hedge funds and asset managers take advantage of rising policy prices, consolidation is on the cards particularly for relatively new insurance investors. This is especially evident in the UK, where dealmakers are keen to complete transactions before the January 2025 UK general election, which could see an increase in capital gains tax. The UK and Ireland are expected to enjoy the highest growth in M&A activity next year, according to the CMS European M&A Outlook 2024 (CMS: Turning the corner? European M&A outlook 2024), and business leaders accelerating M&A plans to secure the current 20% capital gains rate, is certainly one reason why.
Tighter regulations
Dealmakers across sectors have criticised the tighter regulations brought on by Brexit. The Competition and Markets Authority (CMA) has gained greater powers since the change and as a result, potential transactions are scrutinised more closely than before. One article described a “one-stop-shop principle” pre-Brexit, “where [UK] cases referred to Brussels took precedence over reviews in individual EU countries, [but have now] ceased to apply to the UK” As a result, dealmakers face higher stakes and longer waits. This has pushed organisations into paying “more attention to the British antitrust watchdog, the Competition and Markets Authority”(Financial Times: UK and EU divide opens up on dealmaking regulation). Insurers looking to sell or acquire need to pay due diligence to these new stringent regulations, ensuring the costly M&A process isn’t halted.
That said, PIB Group CEO Brendan McManus remains confident, describing the heavily regulated UK climate as “never an insurmountable barrier to what we do […] the industry is used to navigating these and thriving within them – it helps maintain best practices”(Insurance Age: PIB’s Brendan McManus on the future of insurance broking M&A).
Post Covid assurance
While the Covid pandemic may have been disastrous for a number of businesses, for those that have survived, it’s become a merit of confidence. Having proved their resilience, companies that performed well throughout, now approach M&A as sound investments. McKinsey advise “historically, consolidation has tended to follow periods of crisis” (McKinsey: Grow or exit? Overcoming the scale trap in life insurance closed books), and that certainly remains the case post Covid. Shaky geopolitical climates and rising costs may deter some, but for other businesses, taking the leap with acquisition is an investment in security.
In a recent survey, global broking and risk management giant, Aon, found that nearly half of dealmakers expect the volume of M&A deals to increase ‘somewhat or significantly’ over the next year. This comes as a response to an otherwise volatile few years. Discussing M&A in the specialism, Jonathan Clark, Vice President of Corporate Development at McLarens notes, “while the market has seen fewer transactions year to date, the level of activity seems to be increasing based on the chatter in the market”(Insurance News: What’s happening with M&A activity in the insurance market?).
Cyber will both help and hinder M&A
The advancement of cyber over the past few years has led to huge changes in the insurance specialism, both as a growth opportunity and a risk management concern.
Digital solutions such as smart technology and artificial intelligence has the potential to increase business value, but also increase cyber-attack risks. Coined ‘big-game hunting’ by cyber criminals, “ransomware is now evolving into a new era, as criminals adapt their strategies to evade security controls, focusing on critical vendors and aiming for larger targets for extortion” according to one recent report (Resilience: 2023 mid-year cyber claims report).
Aon go on to report, “These solutions inherently contain unclear boundaries with multiple third-party providers. Digital operating models that are not adequately secured bring increased potential for business value to be destroyed in equal or greater amounts than the value created” (Aon: 2023 Top five cyber threats to M&As). Yet, despite the increasing risks, smart technology and artificial intelligence remain powerful tools for growth; businesses looking to gain market share and remain appealing to potential partners / buyers, shouldn’t ignore them.
Looking for advice on the Insurance M&A landscape or keen to explore a new opportunity? Contact our specialist M&A consultant today, Colin McKenna on 07384 548 579 or colin.mckenna@idexconsulting.com
Sources:
Aon: 2023 Top five cyber threats to M&As
CMS: Turning the corner? European M&A outlook 2024
Deloitte: 2023 insurance M&A outlook: balancing uncertainty with optimism
Financial Times: UK and EU divide opens up on dealmaking regulation
Insurance Age: PIB’s Brendan McManus on the future of insurance broking M&A
Insurance Business: What are the two most powerful drivers of M&A in 2023?
Insurance News: What’s happening with M&A activity in the insurance market?
McKinsey: Grow or exit? Overcoming the scale trap in life insurance closed books
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