Navigating Trends: Clyde & Co’s Analysis of Insurance M&A

The global insurance industry experienced a significant decline in mergers and acquisitions (M&A) activity in 2023, reaching its lowest point in a decade, according to a report released by law firm Clyde & Co. The study found a substantial decrease in completed deals across all regions, with the Americas remaining the most active market despite experiencing its own drop. 

The report revealed a total of 346 completed M&A deals in 2023, a stark contrast to the 449 recorded in 2022, representing a 23% decrease. Every region saw a decline in activity: the Americas dropped 5.1%, Europe fell by 20.8%, Asia Pacific witnessed a 13.3% decrease, and the Middle East and Africa experienced the most significant decline with a staggering 37.5% drop. 

Peter Hodgins, Clyde & Co Partner in Dubai, said: “As the global economy continues to feel the impacts of high inflation, funding for transactions for many insurance businesses has been challenging to find. Meanwhile, with over half of the global population expected to be called to the polls in 2024, as well as a number of escalating regional conflicts, heightened geopolitical risks have become a persistent concern. In the face of this market uncertainty, deal-makers have remained in wait-and-see mode, with a negative impact on overall transaction volume in 2023.” 

However, a glimmer of hope emerged in the second half of 2023 with Europe experiencing a promising 22.9% increase in completed deals, while other regions continued to see a decline. The report attributes the overall downturn in M&A activity to several key factors: high inflation making it difficult to secure funding for acquisitions, heightened geopolitical tensions creating increased risks and uncertainty, and potential impacts on debt financing and claims costs due to rising interest rates. 

Eva-Maria Barbosa, Clyde & Co Partner in Munich, said: “M&A activity is coming back to the European insurance market, as leading global carriers look to acquire specific business lines – particularly those high volume, but relatively low premium contracts that can be sold as embedded or affinity products. Companies finding it challenging to achieve healthy margins on commercial business are looking for reliable cash flow in the personal lines space.” 

Despite the overall decline, experts are cautiously optimistic about a potential rebound in the European market in 2024. This optimism stems from the expectation of central bank rate cuts later this year and the increasing interest from leading global insurance carriers seeking to acquire specific business lines within Europe. 

Geopolitical risks in 2023, including conflicts and elections, could force insurers to curtail expansion plans or withdraw from affected regions or lines of business. 

Peter Hodgins, Clyde & Co Partner in Dubai, said: “There is an important role to be played by insurers as businesses get to grips with evolving geopolitical risks. The Middle East has already seen significant events such as the Israel-Hamas conflict and tensions around the Red Sea driving up demand for cover of political risks and products like trade credit insurance as clients’ exposure increases.” 

While challenges remain, the digital asset revolution and the widespread use of cryptocurrencies represent a substantial opportunity for insurers, with a range of coverages already being written to protect against the risks associated with trading these assets. The insurance industry is exploring alternative growth strategies. These strategies include venturing into emerging areas with significant potential like cyber insurance, warranty and indemnity (W&I) insurance, and crypto insurance. 

Liam Hennessy, Clyde & Co Partner, Brisbane said: “Digital assets are on a very fast trajectory globally and we’re seeing great demand for them, and the underlying technology On the commercial side it presents a massive opportunity and some major Lloyd’s insurers are starting to underwrite D&O, corporate crime, and professional indemnity risks on behalf of asset managers who are advising clients on diversifying their portfolios with exposure to this asset class.  Even more exciting, we are seeing insurers adopt blockchain technology in their own businesses for example in loyalty programs, information storage and parametric smart contracts for simple claims.” 

Deal activity appears to have bottomed out and is poised for an uptick in 2024, with Europe spearheading the rebound. In the US, we’re seeing major brokers targeting acquisitions within the MGA and brokerage sectors, alongside increased cross-border transactions. Additionally, international interest in the GCC region is resurfacing, prompting international brokers to seek acquisitions in the UAE and Saudi Arabia. 

Peter Hodgins, Clyde & Co Partner in Dubai, said: “With financial markets potentially looking more volatile this year, growth in carriers’ investment portfolios is by no means certain. Continuing high interest rates will also impact the cost of debt funding for acquisitions and contribute to increased claims costs and higher operational costs. However, in the face of macroeconomic and geopolitical uncertainty insurers are increasingly viewing the current trading environment as ‘the new normal’ and we expect them to become less cautious with regards to M&A over the coming 12 months.”   

As the insurance industry adapts to the “new normal” of operating in an environment characterized by economic and geopolitical uncertainty, these alternative growth strategies offer promising avenues for expansion. As these factors stabilize, a return to pre-2022 M&A levels may be possible in the coming year, with Europe potentially leading the charge, while the integration of digital assets into the insurance landscape continues to evolve.