What's the outlook for M&A in insurance services?
Uncover what will drive the pace of M&A activity and how to navigate deal-making in the current climate.
M&A continues to be an effective way for businesses in the insurance sector to scale, offering companies the opportunity to expand service lines, enter new markets, adjacencies and geographies, and acquire top talent, often at a much quicker pace than organic growth.
Yet, as market conditions (hardening market, inflationary pressure and interest rate volatility) become increasingly challenging, what’s the outlook for the sector/? What will drive the pace of M&A activity? And how can those pursuing transactions ensure success in the current climate?
Tough conditions
There’s no escaping that volatility is increasing in the M&A market. Deloitte’s 2023 insurance industry outlook referred to “instability and uncertainty in the global economic and political landscape” potentially reducing the number of transactions this year. Recent analysis from SP Global Market Intelligence found that insurance M&A “activity slowed significantly in 2022.”
We’ve already seen a reduction in the number of transactions and that will likely continue. External forces are always a factor in M&A and current conditions may make it harder for parties to secure financing and/or come to an agreement on pricing, where expectations often lag behind reality.
Market forces
However, despite these tough conditions, the same market forces that have been in play for some time continue to create a compelling case for inorganic growth through M&A, from increased compliance and regulatory requirements to a desire from clients for more holistic solutions. There remains an appetite within the market to work with a reduced number of partners because of the compliance, partner due diligence and management administration that go hand in hand with vendor management.
As such, there’s still an appetite for M&A if the circumstances are right, and this primarily comes down to whether a transaction supports the long-term strategy of a business and provides better outcomes for the market.
Ensuring long-term success
Considering some of these challenges, how can businesses pursuing an M&A strategy ensure the success of a transaction, both in terms of deal completion and in the longer term?
Ultimately the success of M&A lies in how it performs post-transaction. Primarily, this comes down to a meeting of minds in terms of strategic objectives, culture and whether the deal delivers positive outcomes for the market. Much of this alignment needs to happen before a deal is closed, so alongside technical due diligence, the pre-close phase is a crucial period for building trust and credibility — something that can take time to establish but can be lost very quickly.
The transactions that will have the best chance of succeeding are those where both parties are upfront and open about their objectives and the extent to which these align.
For example, it’s important to be clear on the cultural fit of a prospective partner before closing a transaction — it’s not a good sign if lots of cultural engineering is required post-transaction. Likewise, it’s important to be clear at the outset about what is non-negotiable (e.g. shifting to one accounting system) so that there are no post-close shocks. This is the stage at which both parties should address any issues and, if necessary, step away.
In terms of post-close, “integration” is a word that gets thrown around a lot in the context of M&A and it is clearly important, but integration means different things for different people. There are some things that can’t be integrated and it’s important to scope out the appropriate path for each transaction, for optimal results. There needs to be a strategy in place to support continued cultural and operational integration, spanning from HR to branding, but this will be much more of a challenge if the fundamental rationale for a transaction wasn’t sound, particularly in a market as tough as this.
Jonathan Clark is vice president, of corporate development at McLarens.
Opinions expressed here are the author’s own.
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