M&A predictions for second half of 2023

M&A deals dropped globally in the first half of 2023, but are expected to rebound after a brief lull, said  global law firm Clyde and Co. 

Ever-changing market cycles, geopolitical uncertainty and general economic volatility has meant an uncertain growth outlook for some insurance firms.  

“We anticipate that the volume of transactions will start to rise again towards the end of 2023 as insurance businesses acclimatize to the new operating environment, with the broker segment leading the way,” said Clyde and Co.’s global corporate and advisory team in the report. The firm has locations in Toronto and Vancouver. 

Thus far, the volume of M&A deals sits at 171 for the first half of the year — the lowest deal count since 2017’s first half (170).  

In North America, there have been 79 deals in this year’s first half, the lowest since 2014 (71). This marks a 24% decrease since the previous half-year results (124 in the second half of 2022).  

Comparatively, there were 242 M&A deals globally in the first half of 2022, and 132 M&A deals in North America in the first half of 2022.  

Luckily, the law firm said, the lull in insurer M&A won’t last.  

“[Insurance] businesses are adopting a ‘Keep Calm and Carry On’ approach. Carriers are less dependent on bank financing for strategic transactions as they are restricted to leveraging a smaller proportion of the transaction anyway,” said Eva-Maria Barbosa, a partner at Clyde and Co.  

“With insurers typically balance sheet-heavy at present, the break in carrier M&A activity is likely to be over. Meanwhile, private equity capital is returning to the market for broker deals.” 

But factors that will contribute to, or hinder, M&A growth in the coming months include: cyber, regulation, insurtech, MGAs and AI.

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Cyber presents both a risk concern and a growth opportunity, and Clyde and Co. said cyber exposures have the potential to impact the success of a deal. 

“Anecdotally, many acquirerers have revealed that due diligence around cyber risks of target companies has risen from a top ten to a top five concern when considering potential acquisitions.” 

Similarly, regulation serves as both an aid and a hindrance to M&A growth. 

“Enforcement activities [were] expected to put the brakes on some insurance activity due to the increased cost of doing business, while new legislation in other territories is helping to drive new business opportunities through the acquisition of companies, business units, and legacy portfolios,” said Clyde and Co. 

The good news is regulation will force M&A targets to adopt international best practices, which will further open them up to more opportunities. Especially important, since Clyde and Co. reported there were 38 completed cross-border deals in 2023’s first half — 22% of this year’s global total, compared with 21.5% the previous year. 

Insuretech also might still prove to be a worthy target in some geographies, despite market interest slowing in recent quarters,  

Canada saw a total of 14 insuretech deals in 2022, although investments are slowing overall.  

“The drop-off of investment continues, perhaps due in part to the lack of true insurtechs coming to market – rather than traditional carriers seeking new distribution channels – and a lack of novel insurtech concepts,” Clyde and Co. said of the U.S. market, although it could ring true in Canada as well. 

The insurtech sector may also see new investment inflows, since it’s better placed to leverage emerging technologies, like AI.  

Speaking of AI, however, most insurance companies aren’t yet ready to wield the new technology, despite eagerness at some firms.  

“As the recent experience of some in the legal profession has shown, insurance businesses need to be cautious in their approach to AI, both in deploying the technology and insuring professionals who are making use of AI platforms.” 

It’s likely AI will be featured as an exclusion in some commercial policies, like professional indemnity/liability covers, lest clients attempt to use it for professional decision making — and fall flat in the process.  

AI, however, can enhance customer service capabilities, like chatbots, Clyde and Co. said. 

Lastly, MGAs partnerships are proving popular, but companies may be ready to cut costs and acquire books of business as they look for ways to re-fill coverage gaps. 

Clyde and Co.’s report is based on data by Refinitiv for completed mergers and acquisitions in the global insurance industry for P&C lines such as fire, marine, and casualty insurance, surety insurance, title Insurance and insurance carriers not elsewhere classified.

Feature image by iStock.com/Parradee Kietsirikul