Transformational deals on the rise as insurance bucks M&A slowdown

Insurance mergers and acquisitions (M&A) have remained resilient amid economic volatility driven by a banking crisis and high interest rates.

Faced with uncertainty and other headwinds such as technology disruption, insurance CEOs are betting big. Large-scale, transformational M&A deals are on the rise again, as insurance leaders increasingly leverage these transactions to reposition their business for long-term success, global professional services PwC has found.

Transformational M&As: “Bigger, bolder, riskier”

PwC’s 2023 M&A integration survey shows nearly half (48%) of M&A deals in 2022 were classified as transformational, versus 19% of deals in 2019.

Transformational deals are those where companies acquire new markets, channels, products, or operations that fundamentally change their organization.

In contrast, absorption-type deals remained steady at 33% in 2022 versus 34% in 2019. “Tuck-in” deals – where smaller companies are acquired and integrated by larger organizations seeking access to key products, technologies, or talent – fell to 13% from 37% of deals in 2019.

Stand-alone M&As – acquiring business to be operated separately from the rest of the organization – dropped to just 6% compared to 11% of deals in 2019.

In the three-year period between PwC’s survey, insurance companies contended with unprecedented economic changes that influenced the size and type of transactions seen more recently.

M&As were “bigger, bolder, and riskier” according to PwC, as insurance executives acknowledged the need to make significant moves to keep their businesses thriving.

“Insurance companies have had to look inward, with all the activity in the sector and the high valuations that buyers want to pay,” said Mark Friedman (pictured), US insurance deals leader at PwC.

“They are looking at their books and saying, ‘We have to we have to be ready to compete in the market environment of 2030.’”

How has insurance M&A thrived amid economic challenges?

There were more than $7 billion in announced transactions in the period from November 2022 to May 2023, according to PwC’s survey, showing that M&A in the insurance industry has remained resilient despite a challenging deal environment.

According to Friedman, M&A in many sectors was depressed for the last six to 12 months due to a double whammy of economic uncertainty and high interest rates.

Deal activity is fueled by private equity, which tends to rely heavily on debt financing, and as debt financing increased, so did the cost of financing.

“There was certainty around pricing. Sellers were used to getting certain multiples, and buyers were used to paying those multiples, but the model only worked because the cost of financing was significantly lower,” Friedman said.

“As the cost of financing grows, seller expectations didn’t necessarily come down, so that caused a bit of a cooling of the deal market. Insurance bifurcated into balance sheet companies and fee companies.

“On the balance-sheet side, the valuations of those companies weren’t dragged down by the cost of financing because you don’t really have financing. As the investment portfolio turns over, those deals are going to earn a significantly higher yield.

“On the fee-based business side, we still saw a fair amount of activity among insurance brokerages. We did see a cooling there because companies and platforms, mostly private equity-backed, that had debt facilities in place were able to utilize debt capacity to get deals and make the economics work.”

Brokerages remain a desirable asset for investors

Friedman also noted increased buyer interest in insurance brokerages, which remain an attractive option for investors due to their relative stability. 

“I’ve heard this anecdotally from many different private equity clients who invest in different sectors,” he said. “The single best performing asset they have in their portfolio during uncertain economic times is their insurance broker business, because you still need insurance to run your business in good or bad times.”

Additionally, brokerages are less “working-capital intensive” than other business such as retail stores or restaurants.

“We saw more buyers deploying capital [into the insurance space] that they otherwise would have deployed in other sectors, even with the weight of a potential global recession,” Friedman said. “I think those are the two main reasons we continue to see robust activity in the sector.”

Where is insurance M&A heading in the next few months?

After months of consecutive interest rate hikes, there are signs that the US Federal Reserve may be slowing down on its current tightening cycle, which could spur more M&A activity in the insurance industry in the latter half of the year.

The Fed raised its benchmark overnight interest rate by a quarter of a percentage point to the 5.25% to 5.50% range last July 26.

“I do think we’re headed towards increased activity,” said Friedman. “I think the uncertainty of whether the Fed will hike rates by 50 basis points has sort of subsided. I don’t know if we’re necessarily at the ceiling, but there’s less uncertainty than a year ago.”

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