Transformational offers on the rise as insurance coverage bucks M&A slowdown

Insurance mergers and acquisitions (M&A) have remained resilient amid financial volatility pushed by a banking disaster and excessive rates of interest.

Faced with uncertainty and different headwinds similar to know-how disruption, insurance coverage CEOs are betting huge. Large-scale, transformational M&A offers are on the rise once more, as insurance coverage leaders more and more leverage these transactions to reposition their enterprise for long-term success, world skilled companies PwC has discovered.

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

PwC’s 2023 M&A integration survey exhibits almost half (48%) of M&A offers in 2022 had been labeled as transformational, versus 19% of offers in 2019.

Transformational offers are these the place firms purchase new markets, channels, merchandise, or operations that essentially change their group.

In distinction, absorption-type offers remained regular at 33% in 2022 versus 34% in 2019. “Tuck-in” offers – the place smaller firms are acquired and built-in by bigger organizations looking for entry to key merchandise, applied sciences, or expertise – fell to 13% from 37% of offers in 2019.

Stand-alone M&As – buying enterprise to be operated individually from the remainder of the group – dropped to only 6% in comparison with 11% of offers in 2019.

In the three-year interval between PwC’s survey, insurance coverage firms contended with unprecedented financial modifications that influenced the dimensions and kind of transactions seen extra just lately.

M&As had been “bigger, bolder, and riskier” in line with PwC, as insurance coverage executives acknowledged the necessity to make vital strikes to maintain their companies thriving.

“Insurance companies have had to look inward, with all the activity in the sector and the high valuations that buyers want to pay,” stated Mark Friedman (pictured), US insurance coverage offers chief 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 coverage M&A thrived amid financial challenges?

There had been greater than $7 billion in introduced transactions within the interval from November 2022 to May 2023, in line with PwC’s survey, displaying that M&A within the insurance coverage business has remained resilient regardless of a difficult deal setting.

According to Friedman, M&A in lots of sectors was depressed for the final six to 12 months on account of a double whammy of financial uncertainty and excessive rates of interest.

Deal exercise is fueled by non-public fairness, which tends to rely closely on debt financing, and as debt financing elevated, so did the price 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 stated.

“As the price of financing grows, vendor expectations did not essentially come down, in order that brought on a little bit of a cooling of the deal market. Insurance bifurcated into stability sheet firms and price firms.

“On the balance-sheet aspect, the valuations of these firms weren’t dragged down by the price of financing since you do not actually have financing. As the funding portfolio turns over, these offers are going to earn a considerably greater 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 stay a fascinating asset for traders

Friedman additionally famous elevated purchaser curiosity in insurance coverage brokerages, which stay a pretty possibility for traders on account of their relative stability. 

“I’ve heard this anecdotally from many different private equity clients who invest in different sectors,” he stated. “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 much less “working-capital intensive” than different enterprise similar to retail shops or eating places.

“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 stated. “I think those are the two main reasons we continue to see robust activity in the sector.”

Where is insurance coverage M&A heading within the subsequent few months?

After months of consecutive rate of interest hikes, there are indicators that the US Federal Reserve could also be slowing down on its present tightening cycle, which may spur extra M&A exercise within the insurance coverage business within the latter half of the 12 months.

The Fed raised its benchmark in a single day rate of interest by 1 / 4 of a share level to the 5.25% to five.50% vary final July 26.

“I do think we’re headed towards increased activity,” stated 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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