Insurance companies in the US and Canada slowed their pace of mergers and acquisitions this year, deterred by elevated interest rates, economic uncertainty, and sellers’ high pricing expectations. According to Clyde & Co’s mid-year insurance growth report, the first half of 2024 saw the lowest number of insurance deals (103) completed in that period since 2009.
However, there are signs that dealmaking will rebound soon. Three catalysts are expected to drive future M&A growth in insurance: climate risks, cybersecurity and data privacy, and intelligence (AI).
“Climate change is pushing insurers to navigate issues like the recent track of Hurricane Helene, and those who can forecast and write business in affected regions will thrive,” said Marc Voses (pictured), partner at global law firm Clyde & Co.
“Cyber and data privacy will also drive business, and companies that can offer not just coverage but risk management from an IT perspective will be attractive for M&A.
“Lastly, artificial intelligence is a game changer, helping claims and underwriting teams work faster and more accurately. Insurers that can train AI to meet regulatory obligations will have a clear advantage, and that mastery will drive M&A activity.”
While economic headwinds have played a significant role, North America’s M&A slowdown is not an anomaly, but part of a larger global trend.
Though the US Federal Reserve has slightly eased monetary policy, high interest rates continue to weigh heavily on potential buyers. The cost of servicing debt for acquisitions remains elevated, forcing companies to take a hard look at whether now is the right time to make a move.
Apart from the interest rate environment, inflated valuations of target companies are causing hesitation among potential buyers. According to Voses, inflation has led to companies placing higher price tags on themselves, either because they genuinely believe they’re worth more or because the actual value of the business has risen.
As a result, acquiring companies are forced to re-evaluate whether such deals are financially viable. This cautious approach is likely to persist in the near future, though Voses believes deal activity will pick up again, albeit slowly, as economic conditions stabilize.
On the regulatory front, the outcome of local elections could also influence insurance M&A, according to Voses, even though insurance is regulated at the state or provincial level.
“Insurers may decide to withdraw from certain states or adjust their business strategies depending on the results,” he said.
As for the US presidential election’s economic impact, it's uncertain how much it will affect M&A activity in the insurance industry. “We've been surprised before, and much will depend on public perception and how quickly we get a clear election outcome,” Voses said.
Companies that can help insurers navigate the complexities of climate-related risks or develop innovative solutions for cyber and data privacy challenges will be attractive M&A targets.
On the other hand, using AI to improve efficiency and accuracy could give insurers a competitive edge, driving M&A activity as companies look to invest in technology that enhances their operations.
Regardless of the catalysts for a deal, Voses expects cross-border M&A activity to increase as insurers look to leverage opportunities outside their domestic markets. However, acquirers will need to carefully navigate some challenging technology integration and regulatory complexities.
“There must be real synergies for a deal to work, especially with cross-border issues like culture, IT platforms, and data privacy. These factors can make or break a potential acquisition,” Voses said. “The state of the market is going to dictate whether these companies find commonality and they see that a joining of the two companies is truly going to lend a greater result than being independent.”
International M&A is also expected to see a boost, with North American insurers expanding their global footprint and international insurers looking to invest in the region. Insurers are seeking to diversify their portfolios by expanding globally, driven by the need to mitigate geographic risks and access new markets.
Finally, the need to acquire new talent will continue to drive active dealmaking. If companies can’t directly hire top talent, they may look to acquire companies with those individuals.
“There’s always been fierce competition for talent in North America’s insurance industry, from brokers and underwriters to claims handlers. Some have decades of experience, while others are young, brilliant, and in high demand, especially in newer areas like cyber,” said Voses.
What are your thoughts on the current trends and challenges in insurance M&A? Please share your comments.
