The Calm Before the M&A Storm?
Distributors and carriers in the US should be considering the strategic decisions they will soon need to make to stay competitive
Merger and acquisition activity in the US insurance industry is primed to bounce back after years in the doldrums, according to participants in a recent Insider On Air webinar. Panellists agreed that, although the outcome of the forthcoming presidential election adds macro uncertainty into the mix, brokers and MGAs especially should get ready for a new cycle of consolidation.
There’s been a clear downward trend in insurance M&A activity over the last four years. S&P Global Market Intelligence data shows that M&A deals involving North American insurance brokers as targets decreased about 17% year over year in 2023, even as a single, outlier deal pushed the aggregate transaction value higher.
There were 597 deals in the North America in 2023, down from 721 in 2022. The aggregate transaction value was $19.57 billion in 2023, with Aon PLC's $13.63 billion deal to acquire NFP Corp. accounting for most of it.
The level of deal activity involving insurers in 2023 decreased 2% (96 transactions compared to the 98 recorded in 2022); the aggregate transaction value hit $16.23 billion, a 16.8% increase from $13.89 billion in 2022.
There’s a number of reasons for the fall off in activity, according to Chris Winter, Insurance Leader, S&P Global Market Intelligence. “To start with, the Biden administration and the Federal Trade Commission have made anti-trust scrutiny a focus and companies are hesitant as a result; they don’t want to spend a lot of money trying to make a huge deal happen that ultimately won’t pass regulatory scrutiny.”
On smaller deals, interest rates (and some other factors) have materially changed the valuations of many companies, he adds. Sellers have found it difficult to come to grips with the idea their business might be worth less than it was a few years ago: “From the target company point of view, if you thought your company was worth $100m two years ago it might be difficult to stomach that it’s now only worth $85-$90m. But [the same conditions] can also influence the buyer if they have to pay more to issue debt.”
For some P&C companies it might be more attractive in a high interest rate environment to use capital to grow organically, rather than through a bolt-on acquisition.
“Acquiring a company is hard and a lot of insurance company executives don’t want the headache of an acquisition. They have had a lot of headaches to deal with, from Covid and WFH to partisan politics; many don’t have the appetite to acquire and integrate a company these days,” Winter said.
Hard market considerations
Other panel participants agreed but took a more nuanced and optimistic view
From an investor perspective, Keith Roux, Managing Director, Bain Capital, thinks that the best assets and the best deals are still getting done: “It is just that there is a high degree of selectivity because higher interest rates drive up cost of capital, which should drive down valuations.
“Our view is that the insurance industry is a great place to allocate capital. But it will continue to be driven by unique approaches and creative structures, especially coming out of a hard rate environment. It’s going to be more challenging but opportunities will still exist.”
Phil Trem, President, Financial Advisory at Marshberry, believes that the market in 2024 will exceed 2023 and 2022 volumes in broker deals because the credit crunch of 2023 started to loosen up at the beginning of 2024: “So although the credit markets are more expensive, the available capacity is rising, meeting an uptick in supply as sellers start to think about their future prospects.”
John Stamatis, Howden Capital Markets & Advisory pointed out that a hard insurance market across the board is fuelling strong bottom line growth for distributors and MGAs: “It is widening bid offer spreads on a lot of deals, especially on marginal assets where sellers want to get paid for a continuation of that growth and profitability - but buyers take a more measured view.”
From the standpoint of carriers as buyer, there are concerns around opportunity cost of capital and executives not wanting to want to deal with the distraction of an M&A, Stamatis added. They question using capital for an M&A at a time when organic opportunities in their core portfolios are so attractive, when they can streamline operations and make hay while the sun is shining, he said.
Less appealing insurtechs
Insurtechs have not lived up to the hype around disruptor start-ups, according to S&P’s Chris Winter. He had expected, in the current interest rate environment, where younger companies would be hurting more, to see established players scooping up distressed insurtechs at a bargain price.
“As with Travelers acquiring Corvus, [a cyber insurance managing general underwriter] for $435m, I was expecting that kind of deal to become a lot more common,” he said. “But insurtechs just haven’t disrupted the market in the way they were self-predicting they would.”
He thinks that outsiders underestimated the massive barriers to entering the insurance industry, like getting licensed and submitting to state regulation. It’s meant that these disruptors have been forced to grow at a pace more in line with an insurance company and less than at the pace of a tech company, making them a less appealing target for incumbents.
Also, customers haven’t been so receptive to some of the tech underpinning insurtechs - telematics in auto insurance, for example. Despite the undisputed underwriting advantages offered by telematics, adoption has been slow because of the perceived invasiveness of the black box.
Make your mind up time
But the stars are aligning in the distribution field, according to Marshberry’s Phil Trem: “Most independent agents are seeing better organic growth in top line and profits than they’ve ever seen in their lives - but at some point the cycle will end. Independents are aware of this and asking themselves how they will remain competitive while the bigger intermediaries are building out their services to better serve a wider client base. Should they invest to build out their capabilities to compete or join someone that’s already built that out?
“It's no longer about selling because of the age of ownership – it is about taking a strategic decision in a competitive market.”