During the second half of 2023, mergers and acquisitions (M&A) in the insurance industry were less robust than in previous years. In October, Optis Partners, which tracks M&As, announced that there were 541 deals in the U.S. from January through September 30. That’s down 27% from the 729 in the same time period in 2022.
Will the M&A downturn in our industry continue? Or is this just a blip, with deals set to make a comeback in the coming year? We take a look at what’s behind the M&A decline, the players behind the deals, and what we should expect moving forward.
The Factors Behind Fewer Insurance Deals
Higher interest rates resulting in an increased cost of capital for buyers, fast-accelerating inflation, economic uneasiness, and greater regulatory scrutiny impacted the M&A space. These factors caused buyers and sellers to pull back, beginning in late 2022 and into 2023.
In certain regions around the globe, the appetite for insurtechs waned somewhat. According to a report from Clyde & Co., in Europe, challenges in obtaining capital for insurtech firms were due to ongoing inflation and rising interest rates. On the other hand, the U.S. faced a shortage of actual insurtech startups entering the market.
Furthermore, the increase in cyberattacks influenced M&A considerations, with cyber-risk due diligence becoming a more significant concern for dealmakers.
Let’s Make a Deal: The Players Behind the M&As
According to Optis Partners, deal activity by Acrisure and PCF slowed down considerably in 2023, with 81% fewer transactions this year than in 2022. The top list of buyers for 2023 (as of October) were:
- Broadstreet Partners — 43 transactions
- Hub International — 37 transactions
- Inszone Insurance Services — 27 transactions
- Leavitt Group — 27 transactions
- World Insurance Associates — 24 transactions
- Arthur J. Gallagher — 25 transactions
A report from MarshBerry indicates that private-capital backed buyers accounted for 385 of the 543 transactions (70.9%) through October. Independent agencies as buyers accounted for 82 transactions (or 15.1%), and banks and thrifts as buyers accounted for nine announced deals (or 1.7%) through October. Each of these numbers is down from last year.
Who’s Being Acquired?
In the past few years, the most active M&A sector has been insurance agents and brokers, MGAs, MGUs, and specialty agents. According to MarshBerry, specialty distributors as targets account for 21% of the total deals in 2023. In addition, specialty firm deals increased by a CAGR of 22% from 2018 through 2022, a trend expected to continue as traditional retail brokers expand into the wholesale and delegated authority space.
Positive Signs Ahead for M&A
The consensus in the insurance industry is that the road ahead will be smoother for M&A deals. Overall, inflation has eased, and interest rates have stabilized. The expected continuation of the hard market into 2024 means that insurers will be able to keep commercial rates up, translating into organic growth for brokers and an attractive buy for PE firms and others.
As carriers shift from in-house underwriting to relying on specialized MGAs and MGUs, deal activity will continue in this sector, according to Deloitte and PricewaterhouseCoopers (PwC).
“We expect continuing M&A demand for MGAs, MGUs, and specialty brokers, particularly from private equity (PE) firms. The factors that drove the sector’s acquisition boom are still strong, making interest rates less a factor for PE firms than is borrowing to buy a general brokerage,” said Deloitte.
For example, in the last six months, White Mountains announced the majority acquisition of Bamboo Ide8 Insurance Services, an MGA focused on California homeowners insurance. Zurich Insurance Group-owned Farmers Group also announced the acquisition of three wholesale brokerages, Kraft Lake Insurance Agency, Western Star Insurance Services, and Farmers General Insurance Agency, and access to a flood insurance servicing program.
Furthermore, AIG’s relationship with Stone Point Capital exemplifies how P&C carriers can benefit from the experience of specialized MGAs, according to PwC. Stone Point Capital agreed to launch an independent MGA called Private Client Select Insurance Services, which concentrates on the high- and ultra-high-net-worth markets.
Artificial intelligence (AI) could also help with M&A deals, says WTW. “In the fast-paced M&A world, AI is rapidly emerging as a game-changer and has the potential to significantly speed up M&A deals, from due diligence to post-merger integration. Deployed correctly, AI capabilities may be the key to unlocking greater value through M&A.”
Conclusion
Despite the overall slowdown in transactions across various sectors and the dip in deals in our industry in 2023, insurance M&A remains resilient. M&A activity in the insurance business is likely to increase steadily in 2024. The industry’s shift toward customer-centricity, integration of modern technology, and emphasis on sustainability are anticipated to be major drivers of this comeback.