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Insurance: US Deals 2024 outlook

Insurance dealmaking expected to remain active heading into 2024 

In contrast to the slowdown in other industries resulting from economic uncertainty and other macroeconomic factors, the insurance deals market remained active in the second half of 2023. Insurance carriers remain attractive targets in rising interest rate environments because they’re self-leveraged by nature, which reduces the impact of the rising debt costs that are hampering deals activity in other sectors.

Insurance distributors remain attractive to both consolidators and private equity firms due to their steady cash flow generation and rising commission income during inflationary periods. While insurance distribution deal activity is reliant on debt financing, we’ve seen activity remain relatively strong given the significant demand for these assets. Although valuations have been under pressure in the current interest rate environment, we haven’t seen a significant impact on valuations in this subsector.

For the six-month period from mid-May 2023 to mid-November 2023, there were 318 announced insurance transactions with over $11.2 billion in announced deal value, compared to 298 announced insurance transactions and $7.7 billion in deal value in the previous six-month period from mid-November 2022 to mid-May 2023.

Explore national deals trends

There were four announced insurance megadeals since mid-May 2023. The largest was Brookfield Reinsurance’s announced acquisition of American Equity Investment Life Holding Company, which valued American Equity Life at $4.3 billion. The acquisition expands Brookfield’s distribution footprint and market share in the fixed annuity space. The deal is expected to close in the first half of 2024. Also, National Western Life Group, Inc. announced their signing of a definitive merger agreement with S. USA Life Insurance Company, an affiliate of Prosperity Life Group, which values National Western Life at $1.9 billion.

We expect deal activity in the insurance sector to remain active in 2024. We continue to see a trend in specialty and small commercial lines where carriers are shifting from in-house underwriting to rely more on specialized managing general agents and managing general underwriters (MGAs and MGUs) to drive enhanced underwriting results. As a result, we have seen an increase in deal activity targeting MGAs by private equity-backed consolidators. 

Furthermore, we expect insurance companies to continue to focus on simplifying their portfolios by divesting assets that are deemed non-core to their strategy. 

“Insurance companies are moving away from underwriting all risks to focus on specialization; underwriting the risks they understand best and generally outperform the market on. This shift has driven a number of large divestitures, and we expect this trend to continue into 2024. ”

— Mark Friedman, US Insurance Deal Leader

Key deal drivers

Necessity for business reinvention is driving M&A

Deal activity in the insurance distribution subsector was driven by consolidation of P&C brokers and an increase in acquisitions of specialty MGAs. P&C carriers continue to focus on improved underwriting results and in many instances have shifted from in-house underwriting to leverage the expertise of specialized MGAs. Consolidators see an opportunity to obtain market share, increase fee income and obtain underwriting expertise in markets that would be costly to enter independently. Additionally, there are post-acquisition opportunities for synergies and diversification that reduce volatility and enhance profitability by leveraging a shared service model.  

In the last six months, White Mountains announced their majority acquisition of Bamboo Ide8 Insurance Services, an MGA specializing in underwriting California homeowners policies. In addition, Farmers Group announced their acquisition of three wholesale brokerages, Kraft Lake Insurance Agency, Western Star Insurance Services and Farmers General Insurance Agency, which include access to a flood insurance servicing program. The acquisition expands Farmers product offerings, provides customers more coverage, and should increase new customer acquisition and retention.

Additionally, AIG’s agreement with Stone Point Capital is an example of P&C carriers leveraging the expertise of specialized MGAs. The agreement was for Stone Point Capital to form an independent MGA called Private Client Select Insurance Services, which will specialize in high net worth and ultra-high net worth markets.

We expect specialty MGA deals activity to continue, as P&C insurers look to specialize and expand product offerings by acquiring distributors with a track record of underwriting profitable business.

Specialization is providing resilience for growth and sustainability

We expect that increasing specialization in the insurance industry will be a significant catalyst for deal activity in the near term. As corporate insurers look to simplify their business and allocate capital to their core businesses, divestitures of non-core businesses will continue.  

For example, Allstate recently announced that it will be pursuing the sale of its health and benefits business in a strategic move to allocate more capital to its property and liability business. This move comes after the company previously divested its life and annuity business to Blackstone in 2021. In another example, AIG disclosed plans earlier this year to further decrease its position in CoreBridge Financial. CoreBridge was originally formed in 2021 for AIG’s life and retirement business for the initial public offering. 

Additionally, we have seen a similar trend in the banking sector where banks have divested their insurance brokerage businesses to allocate capital to their core businesses and shore up their capital positions. Some recent examples of this trend include Truist’s sale of insurance brokerage to Stone Point, as well as both Eastern Bank’s and Cadence Bank’s sale of their insurance brokerage businesses to Arthur Gallagher.  

We anticipate the increase in the number of non-core businesses coming to market will meet with strong demand from well capitalized asset managers and private equity players who are either new market entrants or existing players seeking opportunities to further scale their insurance platforms. As these asset managers and private equity firms have access to higher yielding investment portfolios than traditional insurers, we expect them to acquire more permanent capital assets in 2024.

Preserving core profitability

Using M&A to return to core operations is nothing new. Time and again we've seen the potential benefits of divesting non-core business compromised by insufficient planning. For larger companies with centralized shared services, these transactions can result in unbalanced scale in corporate expense efficiencies that were once a key benefit, while also potentially uncovering previous digressions from strategic priorities that were hidden in the larger shared-service expense base.

For example, with centralized shared services, companies can lose sight of actual cost by segment or product line and wind up surprised by the higher overhead and corporate expense ratio that the now separated business once partially absorbed. The key to avoiding the loss of synergies and capturing value is proactively and effectively scaling centralized shared services and distribution models. 

Companies that take the time to understand their shared services and overhead expenses early on will enjoy greater value capture post-transaction. Highlighting and developing mitigation plans for stranded costs pre-close will improve the company's overall expense base and overall deal value over time.

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