PwC deals outlook: Insurance dealmaking expected to remain active in 2024

13 March 2024 – Many financial services (FS) dealmakers entered 2024 with a greater sense of optimism, reflecting on 2023 as a low point in which uncertainty created by macroeconomic factors such as high inflation, rising interest rates and lower economic growth projections dampened M&A activity.

While macroeconomic conditions and geopolitical tensions remain challenging, recent gains in the financial markets and positive signals about interest rates from central banks are slowly inspiring the return of investor confidence.

The challenging market environment creates a strong headwind for market participants to consider M&A transactions. PwC, in its 2024 deals outlook, expects to see dealmakers favouring smaller transactions, rather than megadeals, to facilitate transformational steps. The number of megadeals plummeted from 21 in 2021, to seven in 2022 and just three in 2023. We also expect deal processes to last longer, with analyses becoming more complex.

Current market conditions—combined with necessary ongoing initiatives such as digitalisation, sustainability and workforce challenges—put pressure on FS players to accelerate their transformation to remain relevant and profitable. We expect that M&A, strategic partnerships and alliances in 2024 will focus on deals to leverage data, implement solutions to rising cybersecurity concerns, drive operational efficiencies, and speed up transaction processes.

Besides internal measures, M&A continues to be an essential part of the transformation journey, especially as organic growth faces severe challenges in the current macroeconomic environment.

M&A-related transformation steps may include acquisitions to enhance capabilities and drive future growth through economies of scale and scope. Alternatively, divestitures may help to improve operations and recalibrate business models.

Outlook by sector

Insurance and reinsurance

Overall, the insurance sector remains resilient in a challenging deals environment, with considerable deal activity relative to slowdowns in other sectors. In particular, we expect the following trends and topics to drive deals in the insurance sector now and in the future:

• Insurance brokerage: We expect broker consolidation to continue in a highly fragmented market. As discussed in our spotlight section above, there is increased attention and demand from private equity investors acting as consolidators to benefit from economies of scale.
• Portfolio optimisation: Insurance corporations continue to divest capital-intensive life and annuity businesses to focus on core products and reduce complexity in their operations. This gives insurers an opportunity to reduce costs, improve capital efficiency and redeploy capital to core activities.
• Competition: New market players are disrupting existing value chains. The emergence of non-traditional competitors, including digital platforms and tech giants, puts pressure on established insurance providers.
• Partnerships: Insurance companies are collaborating with insurtechs to leverage digitalisation efforts in areas such as machine learning and artificial intelligence (AI) capabilities.

Joseph Gordon, Director, Head of Financial Advisory, PwC Bermuda, said: “Financial Services businesses remain under significant pressure to further transform their business models to meet current and future challenges and create sustained outcomes. M&A can serve as a catalyst for required transformational steps, either by acquiring businesses to drive future growth or by divesting less profitable or non-core businesses.”

He added: “Ongoing deal activity is expected in the insurance and reinsurance sector, with companies looking to divest complex legacy insurance portfolios with the aim of cutting costs and improving capital efficiency.”

Asset and wealth management

Areas such as digital transformation, shifting investor expectations, consolidation and ‘retailisation’, combined with market volatility and higher interest rates, rank high on the list of asset managers' and investors’ concerns.

As the AWM sector overall is experiencing a deceleration in organic revenue growth and shrinking margins, focus and scale are of the essence. Hence, AWM companies are leveraging M&A to grow their businesses and capitalise on economies of scale and scope.

 The following factors are currently driving deals in the AWM space and are expected to continue doing so in the future:

• Strategic partnerships
• Portfolio optimisation
• Diversification
• Search for scale and leverage

Banking

Dealmaking activity in the banking sector declined in 2023 due to uncertainties connected with bank collapses, interest rate developments and potential risks in loan books. To overcome systemic challenges such as the lack of scale and the saturation in some segments in which competing banks have comparable business models, consolidation is viewed as somewhat inevitable.