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There were 343 transactions announced for the six-month period from mid-November 2021 to mid-May 2022, including two mega deals. Total transaction value was $15.4 billion, down from $31.4 billion in the previous six-month period, when there were 476 announced transactions.
The Federal Reserve raised the US interest rate by 0.75% in June, the biggest increase in almost three decades. The impact of this will be felt across all insurance deals, according to Mark Friedman, a partner in PwC’s financial services deals practice.
The change in the rate environment could lead to a change in the “buyer’s profile,” according to Friedman, particularly as it relates to brokerage mergers and acquisitions. The PwC expert predicted that the market will experience “some temporary dislocation,” with an increase in mergers and acquisitions, but valuations will decline a bit after five years on an upward trajectory.
“With historically low interest rates and relatively cheap debt, private equity saw an opportunity to use leverage to improve their returns, which boosted valuations,” Friedman said.
“If the debt markets continue as they are, I think it will affect valuations and if you look back at the first half of the year, one of the reasons you saw a little bit of a drop was [that] it takes time for sellers’ expectations to reset.”
“What we hear from a lot of PE-backed platforms is that they have a lot of debt on their books, and the interest rate on that debt just got a lot more expensive,” Friedman said.
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“What we are likely to see from PE-backed platforms is a shift from all revenue [being] Paid cash up front to push more towards the profits or a portion of the equity of those businesses from the sellers, into the existing business to the buyer, because it’s hard to pay 15x EBITDA.”
This could mean an opportunity for some of the “corporate strategists,” according to Friedman.
“[Corporates] they don’t rely on leverage as much, but they tend to use cash on their balance sheet,” Friedman said.
“They will have a more competitive model in the future, with PE-backed platforms somewhat handicapped by their ability to use leverage to make the economy work.”
While there will be “winners and losers,” according to Friedman, an environment of rising interest rates is likely to be a “net positive” for insurance companies.
“The industry as a whole is definitely welcoming the higher rate environment, mainly in the long term,” Friedman said.
“While there may be some short-term disruption as a result, it’s a net benefit and a tailwind, so valuations will go higher.”
There has been an “unprecedented” amount of PE interest in buying annuities and life blocks, and Friedman said he expects that to continue.
Read more: Life insurance: the uncertain future of private capital
“Valuations are likely to rise in that space, because underwriting gain is only one part of the equation, and it is likely to remain relatively flat, but you will see improved returns as a result of better-than-expected investment income or reinvestment opportunities. that [could] increase those values,” Friedman said.
As for insurtechs, PWC said they could see renewed interest from traders looking to invest after six to 12 months of listed valuation downgrades.
The “overwhelming majority” of insurtechs that have gone through an initial public offering are now trading at a significant discount, Friedman said.
While in some cases this is “probably justified,” it could also be due to “collateral damage,” according to the deal expert.
“There’s an opportunity there,” Friedman said. “There are a lot of companies, as well as some private stocks, that are looking and trying to identify if there are some companies that have valuations that have been significantly affected as a result of collateral damage and their fundamentals may actually be better than others, in which case you can There may be an opportunity to invest or buy some of these assets at relatively low valuations.”
Insurtechs may face a choice between raising capital at a valuation that could be 20% to 25% of what it was several months ago, merging, or being acquired by an insurer.
“[This could afford] Some insurance companies have an opportunity to upgrade their technology quite aggressively and leverage some of the distribution and other technology these insurtechs have in their existing business to justify their valuation,” Friedman said.