Merger and acquisition (M&A) activity is decreasing from Q2 2022 mainly due to macroeconomic factors. However, as increases in interest rates and inflation ease, it could hamper organic growth and lead to an increase in M&A deals in the coming year.
Globally, 449 M&A deals in the insurance sector were completed in 2022, the highest in a decade, up from 419 in 2021. However, activity fell from 242 deals in the first half of the year to 207 in the second, as inflation and interest rates continued to rise.
While the macroeconomic environment in North America and Europe appears to inhibit activity in the short term, Asia-Pacific deals increased from 42 to 60 transactions year-on-year, with a 22% increase in the second half of 2022.
According to Deloitte’s Global Insurance Outlook 2024, going forward, economists indicate that the worst of the economic downturn is likely to have passed in most parts of the world and while M&A activity is expected to increase, volume may decline from past highs several years. .
Several insurers in the US and Europe are now also exiting more mature markets and exploring entry into higher potential growth regions, such as emerging Asia Pacific, due to relatively low insurance penetration rates compared to more developed countries.
For example, Chubb acquired the accident, health, and life businesses of Cigna in South Korea, Taiwan, New Zealand, Thailand, Hong Kong, and Indonesia, with a value of US$ 5.36 billion., or Zurich Insurance Company Ltd announcing to acquire a 51% stake . in Kotak General Insurance for ₹ 4,051 crore.
InsurTechs at the forefront of acquisition activity
The report also shows that InsurTechs remain at the front and center of procurement activity as carriers increasingly look to these capabilities for point solutions across the value chain to power transformation efforts.
“In the near term, the global InsurTech market may see more activity. Since the stock market crash in 2022, there has been a sharp decline in InsurTech valuations and potential IPOs. Therefore, investors and founders may look for alternative solutions for growth , such as acquisitions to build scale, which could lead to consolidation in the sector,” it said.
Before 2024, other triggers that may signal an increase in M&A activity include many venture funds entering a period of exits and evergreen creation, as this cycle appears to have lagged approaching 2024.
With an increasing focus on cost reduction, insurers could seek to consolidate their operations and streamline processes by shedding non-core business.
As these elements unfold, insurers should be hyper-focused on taking advantage of any potential synergies, especially for carriers looking to increase scale with M&A activity, especially in a recovering economy, Deloitte emphasized.
While merging organizational infrastructures generally requires capital investment, it is likely to accelerate the elimination of unnecessary expenses by avoiding the need for redundant resources once the companies are on a single platform.
The report further pointed out that Insurers may consider updating a potential target list for acquisitions in line with their stated growth strategies. They can work with their corporate development and trusted advisors to uncover opportunities to divest unprofitable or non-core businesses.
“In a quiet M&A market, getting your ducks in a row ahead of a potential uptick in activity is often the differentiator with which a carrier can close the deal,” it added.