Run-off insurance deals become less attractive in risky economy

15 September 2022 Consultancy.uk 3 min. read
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Despite an abundance of capital among investors, oversaturation and increased risk are seeing the ambitions of acquirers in the insurance space cool. New research shows that buyers are becoming more selective in the market, with deals falling to a six-year low in 2022.

In the first half of 2022, private equity generated $512 billion in buyout deal value. While this was high compared to many previous years, it is notably lower than buyout deal value in 2021 – as many private equity houses perceive large acquisitions as bigger risks in a tumultuous economy.

New research from PwC suggests this trend is translating itself into the global insurance market’s non-life run-off segment. ‘Non-life’ insurance is a type of general insurance that protects you against non-life events like property damage, personal injury, and natural disasters. Meanwhile, ‘run-off’ is when an insurance company ceases selling new insurance policies. When an insurance company enters run-off, it loses the benefit of ongoing premiums as a source of income, and its only sources of income then become investment earnings, sales of assets, and potential recovery from reinsurance. In economic boom-times, this can be very attractive – but as the economy looks due to shrink, the potential returns on such investments also fall.

Publicly disclosed deal activity since 2010

Accordingly, the study found that while the M&A market in non-life run-off insurers has remained ‘very active’ in 2022, it was significantly slower than in the prior three years. The analysts note that “an abundance of capital and expertise being available” to be deployed by acquirers means “high levels of deal flow for all transaction sizes” continue. However, the availability of capital in the market in recent years has seen prices rise with demand – in other words, deal values have been the subject of rapid inflation – and as the base of acquirers becomes ‘overly saturated’, so too does the space for transactions of over $100 million.

As a result, buyers are becoming “more selective” about which businesses they are willing to take a punt on. Many acquirers “may not have been able to execute on the number of deals they hoped” as a result – however, in an economy seemingly headed for global recession, and with companies regularly falling into insolvency due to pandemic-era debt repayments, betting the house on extremely expensive acquisitions is becoming less and less attractive.

Due to this, 2022’s tally of deals sits at its lowest since 2016 – another time of global uncertainty in the wake of the Brexit vote, and the election of Donald Trump. While there are still four months for deals to grow beyond 26, if they continue at the year’s current pace, that would only see around 32 deals approximately completed. A far cry from the 53 executed in any of the previous three years.

Deal activity

PwC polled fund-leaders around the world, and found that investors remained more upbeat in North America – with 57% stating they were expecting greater levels of activity in the coming months, while a further 40% said they would see stabilised rates. While this was more muted in continental Europe, a large 40% still said they expected more deals than before, and 53% said there would be similar numbers.

The UK was far more cautious, though. PwC found that only 23% believed there would be a greater amount of deal activity. And while 52% did say they expected ‘similar’ volumes, this leaves 25% of respondents who likely felt activity was set to fall – the highest portion of any region PwC noted.

With the British economy anticipating a deep recession – depending upon which source is consulted – it might not be a surprise that investors there are becoming more risk averse to run-off properties. With inflation expected to peak at the end of the year, rising value of investments will likely slow with that – while a dramatic shrink in the national economy may well trigger a re-setting of prices, amid tumbling demand. In other words, now may be seen as more of a time to get out, and stay out, than get in to UK non-life fun-off insurance.