Lull in insurer M&A ‘short-lived’, market to rebound by end of 2023

Mergers and acquisitions (M&A) in the global insurance industry plummeted in the first half of 2023, with a pronounced decline in the Americas, amid changing appetite for insurtechs and regulatory landscape. But, the lull will be short-lived and deal volume is expected to rebound in the second half, albeit not to the highs of 2022 in the immediate future, a new report has indicated.

Completed insurance carrier M&A worldwide dropped 17% from 207 in the second half of 2022 to 171 in the first half of 2023. Americas saw a 24% decrease in deal volume, with Europe down 22%, Asia Pacific by 9%, according to Clyde & Co’s latest Insurance Growth Report mid-year update.

M&A in the Americas fell to its lowest level since 2014, and in Europe was at its lowest level for more than a decade. The UK was the leading European country in terms of deals, ahead of France and Germany, but dropped to fourth place globally behind Canada and Japan. Meanwhile, the Middle East and Africa was the only region to see an increase in M&A in H1 2023.

Clyde & Co experts argued that one key factor in the overall drop in M&A activity is the “diminishing appetite” for insurtech businesses in certain regions like Europe, where finding capital is proving difficult due to continuing inflation and rising interest rates, while the US has been impacted by a lack of “true insurtechs” coming to market – rather than traditional carriers seeking new distribution channels.

However, interest in insurtech elsewhere, including from private equity remains strong, including in Latin America and Asia, particularly in countries with high levels of internet penetration such as Indonesia, Vietnam, the Philippines and Thailand – for a range of personal lines business, authors noted.

Joyce Chan, partner at Clyde & Co in Hong Kong, said: “Private equity firms are looking at investing in some of the Asia tech players around the region, at all stages of development, with prospective capital providers fairly evenly split between international PE firms and regional asset managers. Meanwhile, as the use of AI in insurance becomes better established, investment is likely to return to insurtech in other regions – as the sector best-placed to leverage the emerging technology.”

Other factors, authors pointed out, are the regulatory hurdles and increased cost of doing business. “We are seeing regulators become more proactive in the Middle East, but it isn’t dampening M&A activity currently. There is a continuing drive by regulators to get carriers to clean up their act and to squeeze out less financially able players. That is creating opportunity through encouraging further consolidation in the market,” said Peter Hodgins, Clyde & Co partner in Dubai.

Cyber continues to rise up the leaderboard, both as a growth opportunity for carriers and a risk management concern, authors noted. The potential impact of cyber exposures on M&A is a growing focus for deal-makers.

Rosehana Amin, Clyde & Co partner in London, explained: “A real risk of cyber incidents is the nature of interlinked systems – when there is a compromise and the related legal issue of who is the data controller. When a purchaser acquires the target company’s data, will the contract make it clear who retains responsibility? Is there an understanding of legacy data that it might be acquiring? If data is compromised, the relevant entity may be subject to scrutiny and liable for potential regulatory fines.”

Clyde & Co predicts that, although deal volume might not return to the highs seen in 2022, M&A activity is anticipated to bounce back during the latter part of this year.

Eva-Maria Barbosa said: “Given that growth in M&A activity typically lags behind improvements in underlying market conditions by anywhere from eight to 12 months, the dip in completed transactions over the last six months is unsurprising. We anticipate that the volume of transactions will start to rise again towards the end of 2023 as insurance businesses acclimatise to the new operating environment, with the broker segment leading the way.

“Those with growth ambitions are also looking further afield. Activity in the US will pick up as we have seen an increase in interest from those looking to obtain direct access to the world’s largest insurance market via strategic acquisitions. Meanwhile, international capital has been re-entering the Middle East through investments in regional brokers and third-party administrators, a trend that is set to continue.”

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