Insurance M&A 2022 outlook

Natalie Ord is M&A Partner at RSM UK

Strong levels of deal activity continuing

Following a rebound in activity during the final quarter of 2020, the insurance intermediary sector has demonstrated robust levels of M&A. A particularly strong first half of 2021 saw deal volumes in the sector return to pre-pandemic levels with a total of 135 UK insurance sector deals last year.

Deal activity has been driven by both private equity and corporate consolidators, looking to strengthen their position in the market and deploy some of the high levels of capital available. Private equity transactions accounted for the majority of deals done in 2021, through either direct investments or bolt-on acquisitions to existing portfolio companies.

With record levels of uninvested capital, continued consolidation and increasing interest from asset managers looking to enter the insurance arena, we expect demand to continue into 2022, particularly for established and growing insurance intermediaries. This inturn will sustain upward pressure on pricing and the multiples being paid.

Premiums remaining high in the near term

Whilst softening can be seen across some personal lines (motor), commercial lines premiums are generally expected to remain high in the near term, with some classes of business, such as PI, hardening further still. Intermediaries with a commission-based structure will be primed to continue to benefit from the hard market conditions but acquirers will be wary of sustainability and the impact on profits when the market softens again.

Technology at the forefront

Now more than ever, there is a need for modernisation of legacy systems and the integration of data-driven decisions in underwriting, pricing and claims. Increased competition from innovative Insurtech firms and enhanced customer demand are forcing the sector to embrace digital transformation. The ability of insurance intermediaries to use data and technology to offer a differentiated, value-led proposition will support higher interest from acquirers.

Continued dominance of private equity

The insurance sector remains attractive for the investment community. In 2021 more than 50% of deals involved private equity –supporting cash out to shareholders, changes of ownership and capital to grow. With high levels of uninvested capital and appetite to capitalise on both platform opportunities and bolt-on acquisitions, we expect demand from private equity to continue to   drive activity throughout 2022.

The importance of underlying performance

With premium financing and bolt-on policies historically being key drivers of profit, the source of intermediary revenue is coming under tighter scrutiny. Business models which rely on sales of non-core brokering products are more likely to be targeted by regulators and cause concern to buyers. Similarly with capacity in some classes tightening, a proven track record of delivering underwriting profits and strength of capacity will also be seen as key.