M&A braces for big moves in the New Year

2021 has been momentous for deals. From AT&T’s media businesses merger with Discovery, Kansas City Southern railroad’s takeover and Square acquiring BNPL company Afterpay, global deals are on a roll. Transactions are expected to top $5 trillion this year. All this, while the pandemic is rising again, the global economy is still flaky, and developed economies are toughening their antitrust stance. The buying and selling frenzy are upending conventional wisdom that conducive state of affairs require stable business environments. Companies seem gung-ho about capitalizing on the uncertainty, momentum is far from slowing down.

The enabling factors include low interest rates and surplus cash. Given that these have been prevalent for a while, the triggers are not clearly understood. Market pundits nail it down to the frenzied optimism that grip retail investors spreading now to corporate chieftains.

In this backdrop, the insurance market is expected to exceed US$7 trillion in premiums by mid-2022. Premiums would grow by 3.3% in 2022 and 3.1% in 2023 in real terms, reflecting rising risk awareness in life and non-life segments in the wake of COVID-19. Continued rate hardening in non-life insurance commercial lines, has also contributed to the growth.

The positivity has bolstered interest in the sector, as deal activity by private equity, asset managers and corporates accelerated through the second half of 2021. From the end of June to mid-November, there were 249 announced transactions, with $34.2 billion in announced deal value, including seven megadeals. Though brokerage transactions drove the bulk of M&A activity, private equity remained active in the L&A insurance space.

Insurtech M&A activity picked up speed in 2021. This included the acquisition of Metromile by Lemonade. Insurtechs also acquired shell companies to become full-stack, as we saw Pie acquire Western Select Insurance. The new year is expected to bring more such deals. The global insurtech market will be worth $119.4bn by 2027, growing at a CAGR of 34.4%.

Insurtech M&A activity in 2022 will be fueled by several drivers. Those that have done well and grown over the past few years are now at a stage when they are either attractive targets for incumbents or are big enough to go shopping for acquisitions themselves to become full-stack. Incumbents, on the other hand, are increasingly seeing acquisitions of insurtechs as a more attractive way to acquire new technologies, sunrise businesses, and know-how. Investors in insurtech companies are also fueling M&A activity, as sale of their investments are an attractive exit alternative.

In insurance brokerage space, M&A is leapfrogging at a record pace with little sign of a slowdown in 2022. PE-funded brokers accounted for 70% of deal activity and bought out independent agencies. Through Q3 of 2021, there were an estimated 550 deals, an increase of 12% over the same period in 2020.

The surge can be expected to persist in 2022 by generating continued M&A activity in the brokerage businesses. Despite ongoing consolidation, the industry continues to be heavily fragmented with about 36,000 independent P&C insurance agencies in the U.S alone. Despite the high volume of acquisitions between 2018 and 2020, the total number remains roughly same, partly from the low barriers to entry of starting an independent agency. A large proportion of agencies are relatively small, with 83% of agencies generating less than $1.25 million in annual revenue. For them and acquirers, consolidation benefits accrue through scale economies engendering increased negotiation power for commissions.

The M&A trend is likely to get further impetus in 2022 as competition increases and market consolidation continues. Carriers will eye lagging insurtechs as targets that can help them expand technological capabilities at a discount. Some will look for opportunities to divest non-core assets to free up capital and refocus their efforts on core competencies. Opportunistic PE and asset managers who are looking to cost effectively increase AUM, are meeting this sell-side activity.

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