March 20, 2023 Deloitte 2023 Insurance M&A outlook

Deloitte explores the trends impacting mergers and acquisitions in the insurance industry.

Insurance M&A activity in 2022 was essentially a tale of two markets. Following a remarkable 2021, in which insurance suffered less than other industries, deal-making tumbled dramatically in the second half of 2022 in response to fast-rising inflation, interest rates, and an uncertain economy.

Deloitte’s 2023 Insurance M&A Outlook, offers perspective on 2022 and expected 2023 insurance M&A activity, with deeper dives into each sector’s dynamics and outlook. The report also discusses regulatory and tax developments likely to impact M&A, along with key trends and drivers.

Some additional highlights from the report outlook include:

• The big trend in 2023: Industry convergence Notably, we expect accelerating convergence with non-insurance players. Already common in banking and related financial services, convergence—or embedded insurance—creates vertically integrated businesses that package insurance along with other products or services.
• Inflation and interest rates are the two most powerful M&A drivers. When rates settle, Deloitte expects to see companies begin to deploy capital for acquisitions. M&A activity will happen, but with subdued frequency and at lower prices compared to the higher valuations in 2021. Deloitte expects insurance brokerage to be the first sector to recover.
• Most insurers began tightening budgets in mid-2022 in concert with the economic slowdown. High market uncertainty and apprehension over transaction financing costs and availability, prompted many buyers and sellers to pull back. We believe buyers remain eager to do deals despite the M&A market reversal, but the likelihood of completing transactions has fallen in the near term.

2023 insurance M&A trends and drivers

How can growth-minded insurance organizations extend their ride on the insurance M&A wave? As part of their strategic M&A planning process, executives should consider how to address the following trends:

1. Continuing MGA/MGU/specialty broker demand: Assuming the slowdown is relatively mild, we expect continuing M&A demand for managing general agents (MGAs), managing general underwriters (MGUs), and specialty brokers, particularly from PE firms. The factors that drove the sector’s acquisition boom are still strong, making interest rates less a factor for PE firms than is borrowing to buy a general brokerage.
2. Elongation of rate hardening: We’re forecasting the elongation of rate hardening, particularly in reinsurance and P&C commercial lines. While hard rate environments usually don’t last, this one appears poised to stretch into 2023, creating a second year of hard rates. That suggests M&A may begin picking up in late 2023 or early 2024. Demand is being driven largely by climate- change-driven weather catastrophes, including in Florida, where reinsurers alone raised prices by as much as 30% in many instances last summer.
3. Growth of alternative capital in reinsurance: The reinsurance market continues to attract alternative capital, including hedge funds and asset managers eager to take advantage of rising policy prices. We may see some consolidation as the de novo class of reinsurance investors, principally those who made acquisitions four to six years ago, looks to exit.
4. Increased L&A tactical deals: Despite the pullback in 2022, in recent years there has been a rise in L&A tactical deals, with back-books acquisitions driving consolidation in life businesses. And pandemic-stressed L&A firms may need to exit noncore lines to retain profitability.
5. Industry convergence: We expect accelerating convergence with non-insurance players. Already common in banking and related financial services, convergence—or embedded insurance— creates vertically integrated businesses that package insurance along with other products or services. Embedded insurance in personal and small commercial lines could exceed $70 billion in premiums in the United States by 2030. A prime example: electronics purchases, in which a retailer offers insurance at point of sale. The same business model is appearing in insurance cross-industry.
6. Embedding auto coverage: We expect to see convergence in auto purchases just around the corner. Tesla Inc. already sells its own insurance to car buyers in 12 states and argues that its telematics promote competitive insurance pricing while delivering a unique understanding of its products and safety and drive-assistance features. Such information improves underwriting data, enabling the company to predict risk and loss ratios more accurately. We also expect other industries, such as technology players with big-data analytics expertise, to buy or build insurance capabilities.

Building resiliency for the path ahead

To offset potential challenges in the coming year, we recommend looking for ways to drive strategic partnerships, such as how insurance and non-insurance partners can go to market together and/or create shared opportunities that generate new income streams.

Insurers should decipher how to stay profitable in a slowed economic environment, with or without recession, and ensure balance sheet health by controlling wages and other costs. For acquirers, we advocate staying current on top-flight potential targets, including monitoring actions that may signal need or willingness to sell. The objective is to manage the current economic slowdown while positioning a business to thrive post-economic slowdown. Insurers that succeed will have the greatest choice of M&A targets—and will likely emerge farthest ahead—in 2024 and beyond.

Insurance M&A Leadership Team:
Barry Chen, Principal and US Insurance M&A Leader

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