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2022 insurance M&A outlook

Explore the trends reshaping M&A in the insurance industry

Mergers and acquisitions (M&A) activity in the insurance sector shows no signs of slowing over the next 12 months. Given the optimistic forecast, executives should evaluate market opportunities that can safeguard future enterprise value now. Discover the insurance M&A trends and drivers that can help identify profitable moves and shape M&A strategies to ride the wave of growth in 2022.

2022 insurance M&A midyear update: Rapid shifts and continued uncertainties

After a record-breaking year, conditions for insurance M&A continue to evolve in 2022 as inflation and interest rates shift. Our midyear update presents five trends and drivers to consider in the months ahead.

Is the insurance M&A market on course for further correction from its historical high? At the beginning of the year, inflation and interest rates were on the radar of both strategic and financial buyers. At that point, we expected inflation to be transitory, and while the Federal Reserve (the “Fed”) may soon increase interest rates to control inflation, expectations at the top of the year were that any increase would be measured. Conditions for the insurance M&A environment have shifted rapidly in the first half of 2022, and the future remains uncertain. If the start of the year is any indication, M&A volume in 2022 is expected to hit a low point compared to outlooks of the recent past. So far, the number of deals year-to-date has decreased by approximately 30%.

In this dynamic market, the execution of transactions is more challenging—increasing financing costs, stock market volatility, and a multitude of other factors. However, our advice to management teams? Stick with your M&A strategy. While there may be opportunities to acquire entities at favorable prices—or enter new alliances—it’s hard to ignore the economic elephant in the room. That is, of course, how long will investor confidence hold in the face of the increasing speculation surrounding a near-term economic downturn, and who will emerge winners from a potential recession.

Download our full report to explore the trends and drivers to stay ahead of in the second half of 2022: macroeconomic factors and their impacts, portfolio repositioning, private equity activity, digital acceleration, and M&A strategy resets.

Looking back at insurance M&A in 2021

Total deal volume across underwriters and brokers increased 40% year over year (YoY) through December 31, 2021—869 deals versus 620 in 2020. Aggregate deal value climbed 165% YoY—$57.5 billion in 2021 compared to $21.6 billion in 2020.

2021 deal volume at the underwriter level increased a modest 3% YoY (67 deals in 2021 versus 65 in 2020). But aggregate deal value jumped 164% YoY, from $17.6 billion to $46.5 billion. 2021 average deal value, meanwhile, cracked the billion-dollar threshold: it grew 121% YoY, from $841 million in 2020 to $1.9 billion.

The life and annuity (L&A) sector led the underwriter field in number of 2021 M&A deals, as sustained low interest rates hobbled profitability of interest-rate-sensitive products and numerous insurers pursued inorganic sources of growth. Through December 31, L&A nearly doubled its YoY total, from 13 to 24 transactions. It also recorded the biggest increase in aggregate deal value—up 234% YoY, from $7.3 billion to $24.5 billion. Average deal value climbed 100% YoY, from $1.2 billion to $2.5 billion.

Meanwhile, the property and casualty (P&C) sector experienced a 17% decrease in deal volume YoY, which is likely due to the current rate-hardening environment and a demand-supply imbalance arising from a lack of attractive acquisition targets. But decreased volume didn’t get in the way of P&C posting a substantial 114% increase YoY in aggregate deal value—climbing from $10.3 billion to $22 billion—and topping L&A in average deal value, at 114% YoY.

The broker sector bounced back from a 2020 dip in transaction volume to record a 45% YoY increase (802 deals as of December 31, compared with 555 in 2020). Brokers’ aggregate and average deal value increased 170% and 136%, respectively.

Read more about 2021’s mergers and acquisitions activity in the insurance sector across underwriting, life and health, property and casualty, insurance brokers, and InsurTech—and see our full insurance M&A outlook for 2022.

Will the insurance industry M&A wave crest even higher?

2020 and 2021 deal metrics set several records, and signs point to 2022 being another strong year. Strategic investors have ample available capital, the stock market appears to be supportive, and there are few anticipated economic, regulatory, or tax headwinds. Cross-border M&A should also contribute to 2022 deal totals, particularly in specialty insurance segments. Potential insurance industry M&A impediments—and these likely are not deal-breakers—are high valuations and a demand-supply imbalance for sought-after products and capabilities.

Insurance finance executives responding to Deloitte’s 2021 global outlook survey expect more active M&A in 2022, with over one-third anticipating heightened takeover activity to be very likely. The appetite appears to be stronger on the L&A side, with 44% of respondents citing increased dealmaking as very likely, versus non-life at 32%. Expanding geographic reach was the top motivating factor across respondents, followed by increasing scale and adding new technology capabilities.

2022 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. Download the full outlook to explore all the important insights.

Portfolio composition will play a critical role as insurance companies consider where to play and how to win in 2022—and amid a next normal shaped by the continuing COVID-19 pandemic, inflation at a 30-year high, and the potential for three interest rate hikes. As companies evaluate their holdings from a strategic perspective of value versus risk and core versus noncore, repositioning may be driven by management’s desire to move from a broad platform to a more focused business model and/or to scale effectively, profitably, and nonlinearly. This portfolio rebalancing is likely to bolster market supply for 2022 dealmaking.

The challenge and opportunity for company leaders is figuring out which markets they want to be in and which customers they want to target and managing their assets and capital accordingly. If a company can rid its portfolio of underperforming or nonessential assets, unlock and redeploy the capital, and obtain higher returns from alternative investments, its leaders will do a deal. Repositioning portfolios is an important step to unlocking M&A-related opportunities, but it is not the end game. Many insurance companies, hobbled by historical inertia, also may need to redesign their business and operating models to take full advantage of newly streamlined and prioritized portfolios.

By some estimates, private equity (PEI/PE) firms have a combined $2.5 trillion worth of dry powder ready to be deployed on insurance M&A opportunities, which some PEs view as a more predictable investment than other, more volatile financial services sectors. Already active in the distribution space—PEIs and PEI-backed established aggregator platforms drove almost 60% of the insurance brokerage deal volume in the first six months of 2021. These firms are widening their lens to include underwriting acquisitions, such as deals for assets that support the liabilities to increase assets under management (AUM) and create a fee-based structure.

The recent P&C sector rate hardening has sharpened PE interest in pursuing select opportunities in the commercial P&C sector, particularly the specialty segment, as it is expected to experience the biggest uptick in pricing.

PE shops view M&A as a more effective way to build their AUM than fundraising for new funds. The PE firm can buy an insurance company or book of business, put a minimum amount of capital behind it to satisfy regulators that the liability is covered, and manage the asset block on its platform, for which the firm earns a fee. In particular, L&A businesses are attractive to PEs because they’re more capital-intense, provide more assets for the PE to invest on its platform, and earn a higher rate of return on that capital. This increase in returns also allows PEs to bid aggressively in future M&A transactions.

Digital technology is proving to be the key to insurance industry transformation. Companies are increasingly dependent on emerging technologies and data sources to drive efficiency, enhance cybersecurity, upgrade policy administration and claims systems, and expand automation capabilities across the organization. Accelerating digitization can help insurers improve the customer experience by streamlining processes with automation and providing customized service where needed and preferred.

Insurance companies are using technology acquisitions to complement their existing suite of products, as well as to diversify to offer multiple services. As the marketplace shifts due to increased technology use, those traditional insurance companies not structured to take advantage of digitization may look for acquisitions/alliances outside of insurance to create a platform for their solutions. This may align with new/renewed interest by tangential financial services industry and technology giants with data analytics capabilities to partner with insurance incumbents and extend or expand their presence in the marketplace.

Certain US states are actively promoting InsurTech development by creating regulatory sandboxes so that new technology offerings can be developed in a safe regulatory environment. This may encourage the startup community and help drive early-stage investment.

All of the insurance ecosystem changes being introduced and influenced by the pandemic—accelerating digitization, evolving customer behaviors, and access to relatively cheap capital—have made this an optimal time to develop M&A strategies that take into consideration shifts in market conditions that could warrant examining the acquisition or disposition of assets. Given the episodic nature of deals in the sector, many executives have never been exposed to or have had limited experience with a transaction. As such, developing an M&A strategy that defines company appetite and deal characteristics based on an identified inorganic business need is paramount to taking advantage of market opportunities versus competitors.

We use the term, “setting M&A appetite” quite intently here, as it is analogous to defining the underwriting and risk parameters in bringing insurance products to market. It would be unwise to bring a new product to market and/or allow brokers and underwriters to bind business without first setting the parameters within which defines acceptable risks. The same holds true for M&A strategy and, all too often, we see executives recognize a need for an inorganic play and then immediately look for an asset or respond to a banker inquiry without first defining the parameters within which to seek and evaluate potential targets.

In considering strategy, executives should broaden the definition of M&A to include alliances, partnerships, ecosystems, platforms, and joint ventures, as these are all considerations for inorganic options and are a means to an end, like the choice to acquire or dispose of assets. But we often find that executives start contemplating M&A strategies when presented with a deal or partnership opportunity, which leads to a lot of unnecessary churn and, more often than not, limits their respective abilities to act upon the opportunity. Taking a proactive approach now to defining an M&A strategy will pay significant downstream dividends by providing agility when seeking out or reacting to market moves.

The US economy and, more narrowly, the insurance industry haven’t seen the combination of higher inflation rates and higher interest rates in quite a while. Whether the current high inflation proves to be transitory or endemic, it has the potential to impact insurance company financials, operations, and M&A decisions in 2022.

To begin, rapid increases in demand for goods, materials, and labor, as well as ongoing supply chain disruptions, have been raising claims costs for personal and commercial property losses. Corresponding price hikes for construction materials, rental vehicles, and auto parts are among the expenses threatening to drive up insurer loss costs into 2022. This factor alone is likely to push P&C prices higher for buyers and, in turn, push some buyers out of deal contention.

Sustained high inflation may also prolong the P&C sector’s hard market. Insurers hit with rising claims costs have to pass premium rate increases along to customers. But because inflation touches all insurance companies, consumers are limited in their ability to migrate to new carriers; they can’t shop themselves out of higher rates.
For businesses worried about what will happen with inflation, there is good reason to expect that the current situation will abate within the next 12–18 months. Financial indicators suggest that the investment community remains unconcerned: Fear of persistent inflation has not been reflected in the bond market. Rather, bond investors in the United States and Europe appear to accept the argument of central bankers that the current inflation is transitory and likely to be quickly reversed. Businesses can plan to simply manage a temporary shock while awaiting a return to normalcy.
The other half of this economic equation is the prospect of three increases in short-term interest rates in 2022, which US Federal Reserve Chair Powell alluded to at the Fed’s December 2021 meeting. Higher interest rates’ impacts on insurance company financials and M&A activity can swing both ways: As interest rates rise so, too, will insurers’ investment income, helping improve cash flows—welcome news for L&A insurance providers whose returns have been in the doldrums. In another positive, higher interest rates typically increase company valuations, which can strengthen sellers’ negotiating position.

We don’t anticipate any significant headwinds for 2022 insurance industry M&A arising from accounting, regulatory, or tax influences. In general, regulators have been pleased at how resilient the industry has been under various stressors. We have, however, been seeing some changes in focus among advisory and regulatory bodies (e.g., climate change; environmental, social, and governance [ESG] issues) as well as the progression of (and increasing clarity around) certain country and global regulations and standards that merit watching.

Accounting developments

The US National Association of Insurance Commissioners’ (NAIC) Statutory Accounting Principles Working Group (SAPWG) did not adopt any substantive items during its 2021 Summer and Interim Meetings. Eighteen non-substantive items (changes that clarify existing accounting principles) finalized during these meetings were effective upon adoption. As the adopted items impact both L&A and P&C sectors, we suggest that insurers review Deloitte’s NAIC Summer 2021 National Meeting update for details.

Regulatory developments
Global insurers are concluding preparations to comply with International Financial Reporting Standards 17 (IFRS 17), determining how insurance assets and liabilities are presented on company balance sheets. Implementation of IFRS 17, due to go into effect in January 2023, ultimately could cost global insurers between $15 billion and $20 billion. The United States is one of the few countries not adopting IFRS 17. As a result, many global insurers are also managing the parallel implementation of Long Duration Targeted Improvements (LDTI), the US GAAP analog of IFRS 17, which also has a January 2023 effective date. LDTI implementation efforts have been ongoing since early 2019; however, respondents to a June 2021 Deloitte survey report their preparations are, on average, only 42% complete.

Climate risk and ESG
Many insurers have been accelerating efforts to quantify and address climate risk in both their underwriting and investment portfolios, driven in part by increasing demands for data and evidence of concrete mitigation action from a variety of stakeholders. The International Association of Insurance Supervisors’ (IAIS) executive committee adopted a paper to help regulators “promote a globally consistent approach to addressing climate-related risks,” and a number of regulators have already launched their own initiatives.

The focus is on assessing any potential climate-related gaps in insurer supervision and regulation and the possibility of major market disruptions, as well as ways to help insurers achieve climate-related goals. Climate change is just one part of a broader insurance industry imperative to tackle a host of ESG concerns. Moving away from the environmental aspects to the social components of ESG, financial inclusion is increasingly coming to the fore. As insurance companies consider their future strategy, financial inclusion may be an important factor as it impacts many aspects of an insurer’s business model and there could be significant, mutually realizable benefits for both the insurer and insured.

Moving forward on 2022 insurance M&A opportunitiesThe deal marketplace is replete with abundant capital and willing buyers for asset classes that provide a rate of return commensurate with the risk, even though the competition for high-value targets may be fierce and inflationary concerns may complicate the valuation process. Both factors are likely to drive up prices—potential buyers in 2022 should be prepared to write a big check relative to the opportunity.

As insurance executives continue to examine how M&A can help safeguard future enterprise value by establishing more resilience in what they do today, it offers them ways to strategically consider options to extend, expand, and move into new markets.

If you’d like to talk more about insurance M&A activity and how your organization can thrive in 2022, let’s set up a conversation. And visit our Insurance industry page for broader industry insights, analysis, and resources.

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