Examining the Mergers and Acquisitions Landscape in 2023

As we cross the midpoint of 2023, the property and casualty (P&C) insurance sector continues to experience a complex mergers and acquisitions (M&A) landscape.

Source: ProgramBusiness.com | Published on June 21, 2023

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As we cross the midpoint of 2023, the property and casualty (P&C) insurance sector continues to experience a complex mergers and acquisitions (M&A) landscape. Following an exceptional year in 2021, transaction volumes tumbled in the latter half of 2022, with overall deal value dropping 69% from 2021 levels.

In a business environment characterized by high interest rates, economic uncertainty, rising capital costs, record-high economic inflation, social inflation, climate change, and other factors, it is perhaps, unsurprising, that M&A activity has been stalling. However, players in the P&C industry are still eager to engage in M&A activities as a strategic response, despite the current challenges. In the following article, we take a closer look at the state of M&As and how the P&C industry can best capitalize on the current trends.

The State of Mergers and Acquisitions in the Property and Casualty Space

M&A activities within the P&C insurance sector experienced a significant slowdown in the past year. In 2022, deal volume declined by 12%, with 38 transactions totaling $13.5 billion, compared to 43 transactions worth $22 billion in 2021. Overall deal value dropped by 39% from the previous year. The following represent some of the key contributors influencing these trends in M&As in the P&C market.

Auto commercial lines

The profitability of auto commercial lines, which had improved in 2021 and early 2022, declined significantly in late 2022 due to inflation and supply chain issues. Auto claims costs increased by 10%, driven by rising costs of vehicles, parts, and repairs, despite continued demand from individual and fleet policyholders.

Homeowners lines

The homeowners market also faced a surge in claims costs, with a 10% increase attributed to higher labor and materials costs, ongoing supply chain disruptions, and geopolitical risks related to building materials sourcing.

Social inflation and jury awards

The P&C sector was significantly impacted by social inflation, as jury awards continued to rise, including large verdicts exceeding $1 billion. The uncertainty surrounding casualty claims costs and potential liabilities deterred potential acquirers, despite rate hardening in recent years. The prevalence of natural disasters in Florida, such as hurricanes, negatively affected the sector’s earnings, leading to concerns of a potential collapse in the homeowners’ market.

Fraudulent claims also became a significant issue, particularly in Florida, where a high number of lawsuits were found to be fraudulent. This situation, coupled with increasing jury awards, made conducting business in the state challenging for many insurers. However, in response, Florida enacted comprehensive property insurance legislation in December 2022 to address these issues and provide relief to insurers.


In response to six consecutive years of significant losses, Florida lawmakers established a reinsurance fund of $1 billion. This move aimed to address the rising demand for reinsurance, which has been met with declining capacity worldwide. Typically, such a scenario would lead to rate increases among the remaining carriers. However, in 2022, reinsurers faced substantial losses due to climate change-related property damage and the strengthening of the U.S. dollar against the euro, affecting European-based companies. Additionally, the Russia-Ukraine conflict resulted in European reinsurers experiencing the withdrawal of corporate policyholders from Russia, leaving insured property, assets, and inventory behind.

Regulatory developments

Insurance regulators are increasingly concerned about the economic impact of climate change, as natural disasters become more frequent and severe. They are worried about affordability of coverage in disaster-prone areas and potential insolvency risks for P&C carriers and reinsurers. InsurTech companies can expect increased scrutiny regarding cybersecurity, data protection, and the use of artificial intelligence and machine learning. Privacy issues, including data storage and deletion, are also receiving more attention.

Accounting standards changes

The implementation of Long Duration Targeted Improvements (LDTI) and International Financial Reporting Standard No. 17 (IFRS 17) accounting standards in 2023 will have a significant impact on insurance companies’ financial reporting. LDTI primarily affects the life and annuity (L&A) sector, while IFRS 17 has a broader scope. Insurance companies with global operations may face compliance requirements under both standards, leading to increased operational complexity. M&A transactions need to consider the potential impact of these standards, which could influence divestment decisions or the use of reinsurance agreements.

Tax developments

The Inflation Reduction Act (IRA) implemented tax changes that may impact insurance M&A. This includes a new book minimum tax on corporations with high annual adjusted financial statement income, potentially affecting insurers due to the industry’s volatility. The act also introduced an excise tax on share buybacks, which could influence deals on the margins of viability. Additionally, transferrable or refundable energy tax credits may provide transaction flexibility and affect M&A pricing. Increased funding for the IRS suggests greater scrutiny of complex transactions.

Global minimum tax (GloBE)

The implementation of GloBE, a framework for common corporate taxation agreed upon by over 130 countries, is progressing. Pillar Two of GloBE relies on book accounting data and is expected to take effect in 2024. The minimum tax is likely to increase cross-border investment costs and reduce the appeal of low-tax jurisdictions. Companies should consider modeling financial scenarios and creating contingency plans based on the location of targets and parents.

2023 Outlook for Mergers and Acquisitions

This year, the trend in M&A activities within the P&C sector has been a combination of traditional insurance company consolidations and increasing interest from non-insurance financial investors, including private equity and pension funds. This change denotes a significant transformation in the M&A landscape, a trend primarily driven by the potential for value creation and robust future growth within the sector.

Looking forward, companies are expected to deploy capital for acquisitions once interest rates settle, but at lower prices compared to 2021. Insurance brokerage is likely to be the first sector to recover, serving as an indicator for M&A activity. Private equity interest in brokerage remains strong. Valuation spreads between buyers and sellers may continue to be an issue, and sellers may need to adjust their expectations. Ultimately, the recovery of the insurance M&A market is dependent on the duration and depth of the economic slowdown, with a potential recovery expected in late 2023 or 2024.

The Strategic Upside of M&A Activity in the P&C Industry

M&As represent powerful strategic tools within the P&C industry, offering companies various potential advantages. At the forefront is the opportunity to optimize capital structures. By strategically consolidating debt and equity, companies can enhance their financial flexibility, uplift their credit ratings, and lower their cost of borrowing, resulting in improved financial health and stability.

Additionally, M&A transactions can catalyze long-term synergies that bolster profitability and enhance market presence. By integrating companies with complementary capabilities and strengths, M&A activities can unlock increased efficiencies, streamline distribution channels, and pare down production costs. This blend of operational forces can empower companies to serve their clientele and stake a more significant claim to market share. Moreover, M&A provides a platform for companies to diversify their service and product offerings, broaden their customer base, and penetrate new markets.

Lastly, M&A activities in the P&C industry have the potential to confer a broad spectrum of benefits. They offer avenues to optimize capital structures, foster long-term synergies, and create diversification opportunities. By leveraging M&A, companies can expand their reach, catalyze growth, and secure a more robust standing in the P&C market.

Scale and Efficiency Motives

Due to the need for scale and operational efficiency, traditional insurance company consolidations remain a mainstay of M&A activity. The relentless demand for technological innovation and regulatory compliance pressures have encouraged industry leaders to merge or acquire smaller competitors, leveraging shared resources for increased competitive advantage.

Insurance carriers are making strategic acquisitions to expand their portfolio, extend their geographical footprint, and gain access to newer markets. For example, InsurTech companies have become pivotal in facilitating the insurance value chain, with a significant portion (63%) collaborating with insurers rather than aiming for industry disruption, according to McKinsey & Company. In the present InsurTech landscape, where capital is limited and the pursuit of profitability is urgent, insurance companies find themselves in a favorable position to negotiate with their existing digital and technology vendors, as well as potential platform vendors for technology enhancements and upgrades. This presents insurers with their strongest bargaining power in years.

Private Equity Involvement

There is a growing trend of private equity firms and other financial investors venturing into the P&C industry. This trend signifies a significant shift from traditional industry M&A to private equity, with its large pools of capital and appetite for diversified investments. It views the P&C insurance market as an appealing prospect due to its resilience, profitability, and opportunities for capital deployment.

Private equity involvement has accelerated M&A activity by introducing a new competitive element. These firms are increasingly bidding for P&C companies and portfolios, raising valuations and intensifying competition for targets. These developments have created an environment that has spurred activity, generating substantial deal flow.

Risk Management and Regulatory Challenges

Despite the active M&A landscape, the P&C industry faces several challenges. Mergers and acquisitions inherently involve integration risk, reputational risk, and potential failure to realize expected synergies.

In 2023, with the implementation of more stringent regulatory policies globally, P&C companies must navigate these complexities with diligence. Regulatory compliance has emerged as a significant concern in cross-border M&A transactions, with companies needing to adhere to varying regulatory requirements in different jurisdictions.

The Complexity and Potential of Cross-Border Deals in the P&C Industry

With unprecedented M&A activity in the P&C industry, cross-border deals are becoming increasingly significant. These international transactions offer vast potential for market expansion, diversification, and technological advancements but come with unique challenges, including regulatory compliance, cultural disparities, and language barriers.

Key drivers behind cross-border acquisitions include pursuing new markets and the favorable economic landscape defined by attractive interest rates and tax reforms. These conditions incentivize P&C companies to venture beyond their domestic markets and seize opportunities abroad. Nonetheless, geopolitical dynamics such as trade tensions and complex exit processes like Brexit pose substantial hurdles to this endeavor.

Digitization Poses Significant Cross-Border Deal Risks and Opportunities

The industry’s relentless push towards digitization is another critical motivator for cross-border activity. P&C companies actively seek to integrate advanced technologies and often resort to international M&A to absorb innovation from overseas tech firms.

However, navigating a cross-border transaction comes with risks. Differing regulatory frameworks across jurisdictions present significant obstacles. Companies must adhere to many regulatory standards, including stringent antitrust laws, to evade potential legal and financial pitfalls.

Moreover, information security is a critical concern during cross-border transactions. The exchange of confidential data between parties introduces a risk of leaks that could damage reputations and compromise competitiveness. Economic volatility, particularly in the face of global crises, can further hinder deal processes, causing potential delays and reputational harm.

While cross-border deals present expansive opportunities in the P&C industry, they demand careful due diligence and stringent compliance measures to mitigate risks. By doing so, companies can fully harness the potential of these transactions, driving growth and technological prowess in an increasingly globalized industry.

Implications and Opportunities for Insurance Professionals and Clients

The rising tide of M&A activity in the P&C industry is ushering in significant changes for insurance professionals and clients.

  •     Market Dynamics Shifts: Consolidation can spur intense competition, potentially impacting pricing and coverage terms. Professionals must adeptly navigate these fluctuations to procure optimal coverage for clients at competitive rates.
  •     Integration Complexities:Mergers often introduce operational and cultural integration hurdles. Professionals should anticipate and help clients navigate potential disruptions to their coverage or service levels.
  •     Growth Prospects:The evolving M&A landscape offers professionals chances to expand their businesses, leveraging insights from the latest M&A activity to identify growth opportunities.
  •     Necessity of Specialization:With the P/C industry gravitating toward specialization, professionals should cultivate expertise in specific niches to set themselves apart and cater more effectively to their clients’ unique needs.

Outlook for the Second Half of 2023

As we look towards the second half of 2023, the M&A landscape in the P&C industry is likely to remain active. Continued interest from traditional P&C insurance companies and financial investors and the sustained need for innovation and scale should continue to drive M&A activity.

Yet the sector has challenges. Regulatory complexities, integration risks, and economic uncertainties could slow the pace of M&A transactions. Companies are expected to conduct more rigorous due diligence processes, focus on post-merger integration, and develop comprehensive risk management strategies to navigate this evolving landscape successfully. The implications of these activities will continue to reshape the P&C insurance industry, introducing new competitors, fostering innovation, and redefining the sector’s future.