2023 insurance M&A outlook: Balancing uncertainty with optimism

A tale of two markets: Looking back at insurance M&A in 2022

Following a buoyant 2021, transaction volumes and values began tapering off in the first half of 2022, then tumbled in the second half. Total US and Bermuda volume in 2022 fell to 638 transactions with an aggregate value of $17.7 billion, a 27% volume decrease from 869 transactions totaling $57.5 billion in 2021. Overall deal value dropped 69% from 2021’s level.

For the first six months of 2022, total deal volume reached 254 transactions valued at $16.5 billion, a 32% volume decrease over 374 transactions equaling $22 billion in the same period the preceding year. In the latter six months of 2022, there were 384 deals valued at $1.2 billion, a 22% volume decrease from 2021’s comparable period.

Stalling insurance industry mergers and acquisitions activity directly reflected the year’s fast-accelerating inflation, which hit a 40-year high. Most insurers began tightening budgets in mid-2022 in concert with the economic slowdown. High market uncertainty—stemming from hard-to-predict inflation and interest rates, rising capital costs, and apprehension over transaction financing costs and availability—prompted buyers and sellers to pull back. We believe buyers remain eager to do deals despite the M&A market reversal, but the likelihood of completing transactions has fallen near term.

Looking for a deeper dive into the year in review? Our full 2023 insurance M&A outlook examines insurance M&A activity across megadeals; insurance brokerage; property and casualty (P&C); life and annuity (L&A); InsurTech; economic impacts; and regulatory, accounting standards, and tax developments.

What’s the insurance M&A news for 2023?

Not surprisingly, the two most powerful 2023 M&A drivers are inflation and interest rates. The Federal Reserve Board (the Fed) has indicated that it expects to continue raising rates, but in smaller increments than occurred in 2022. When rates settle, we expect to see companies begin deploying capital for acquisitions. M&A activity will happen, but with subdued frequency and at lower prices compared to the higher valuations in 2021.

We expect insurance brokerage to be the first sector to recover. Given its high deal volume and appeal to PEs, distribution likely will be a leading indicator for insurance M&A overall. The fact that PE interest waned only slightly last year suggests that financial buyers view brokerage positively despite rising interest rates and believe that longer-term growth will offset any increase in deal cost. In the interim, however, brokerage appears to be influenced by insurance M&A softness overall.

When insurance M&A begins to recover will depend on the length and depth of the economic slowdown. Based on current forecasts by economists, however, we believe the insurance M&A market may begin to recover in late 2023 or 2024.

Building resiliency for the path ahead

To offset potential challenges in the coming year, we recommend looking for ways to drive strategic partnerships, such as how insurance and non-insurance partners can go to market together and/or create shared opportunities that generate new income streams.

Insurers should decipher how to stay profitable in a slowed economic environment, with or without recession, and ensure balance sheet health by controlling wages and other costs. For acquirers, we advocate staying current on top-flight potential targets, including monitoring actions that may signal need or willingness to sell. The objective is to manage the current economic slowdown while positioning a business to thrive post-economic slowdown. Insurers that succeed will have the greatest choice of M&A targets—and will likely emerge farthest ahead—in 2024 and beyond.

If you’d like to talk more about insurance M&A activity and how your organization can thrive in 2023, let’s set up a conversation. And visit our Insurance industry page for broader industry insights, analysis, and resources.