Insurance M&A at highest growth rate in 10 years – Clyde & Co report

After strong growth in H2 2021, the number of deals in Europe dropped to 67 in H1 2022 from 74 in the previous six months. The UK was the most active country for M&A, followed by France, the Netherlands and Spain.

Deal activity in the Middle East and Africa rose in the first half after a dip in 2021, with 16 deals posted, compared to 12 in the second half of last year. The majority of acquirers in this half were from Africa – four from the Ivory Coast, three from South Africa and two from Kenya.

The number of deals in Asia Pacific rose slightly to 27, from 24 in H2 2021. Japan was the lead acquirer in the region, followed by Australia.

“In the face of stark economic pressures – inflation, rising energy costs, and looming recession – insurers remain focused on growth opportunities,” said Eva-Maria Barbosa, partner at Clyde & Co in Munich. “Several factors are driving reals. Rising interest rates promise better investment returns for long-duration businesses, while helping insurers to rebalance portfolios. Private equity firms and asset managers are still keen to explore either entry into the insurance market or expansion of existing footprints. And flagging insurtech valuations mean acquisitions are increasingly attractive to both PE investors and traditional carriers seeking to increase technological capabilities.”

The number of deals valued at more than US$1 billion remained relatively steady, with 13 in H1 2022 compared to 14 in the second half of last year. The largest deal of the year so far was the sale of US-based Athene Holding to Apollo Global Management for US$7.7 billion.

Another area where there has been a significant rise in transactions is the divestment of non-core assets by carriers focusing on core business, Clyde & Co said.

“Europe has seen a large number of run-off deals, which are used to make sure there isn’t any unwanted old business sitting on the balance sheet that might hinder a possible M&A transaction,” said Ivor Edwards, Clyde & Co partner in London.

Private equity interest in the insurance sector remained strong, especially with respect to the broker space. PE investment has also focused on the carrier space in selected territories, including investments in Lloyd’s, the report found.

“There are still a lot of PE investors who prefer to go ‘balance sheet light’ or to stay with intermediaries or companies servicing the insurance industry, and this is driving significant consolidation in this part of the insurance sector,” said Peter Hodgins, Clyde & Co partner in Dubai. “There nevertheless remains a number of very large, highly professional PE funds that are really interested in the insurance industry, and we continue to see the growth of regional insurance conglomerates.”

Interest in the insurtech sector appeared to wane in the first half. While the sector has seen significant investment over the last few years, investors are increasingly nervous due to the uncertainty of the current economic climate, the report said.

Insurtech valuations in the US have continued to worsen in 2022. In other regions, growth in the sector remains modest, with limited numbers of insurtechs in the Asian markets, where upfront capital requirements remain a stumbling block. Insurtech investment in Europe has also seen limited activity, with partnerships between insurtechs and traditional carriers a more likely route to growth, Clyde & Co said.

“Although the uptick in insurtech companies finding funding and going public seems promising, the heightened risk to these companies due to the current economic climate lingers,” said Marc Voses, Clyde & Co partner in the US. “With more than 450 insurtechs failing over the past decade, success has proven to be an exclusive club for many.”

Overall market sentiment in the insurance sector remains broadly positive despite ongoing global economic headwinds.

Carriers remain cautious about investment, and many are holding back on plans for international expansion, especially with spiking inflation dissuading many insureds from buying cover.

The industry also faces hurdles from rising energy costs, low investment returns, supply chain issues, and the possibility of a recession. Carriers also have to contend with increasing ESG requirements and the potential risks if those requirements aren’t met, the report said.

“While there is some uncertainty in some regions about the direction of travel, for those companies that are still looking at M&A as a way of equipping themselves for transformation, the deals will be driven by business strategy,” said Joyce Chan, partner at Clyde & Co in Hong Kong. “So, for example, purchasing a tech service provider or acquiring competitors who have better distribution infrastructure of technological capability.”