ESG a ‘make or break’ factor in M&A in 2023

Environmental, social and corporate governance (ESG) regulation has the potential to “make or break” M&A deals this year, as re/insurance industry firms look to grow much faster in 2023 after the relative growth hiatus of the past few years.

This was the view of Eva-Maria Barbosa, partner at law firm Clyde & Co, as she discussed M&A trends in re/insurance on an Intelligent Insurer panel with Rowan Bamford, president of Liberty Global Transaction Solutions (GTS).

Regulation will play a big role in M&A activity, Barbosa said. “With everything that’s coming down on insurers and reinsurers, including an ESG market, to have the scale to stomach that and be a big player in the market is very valuable.

“I believe in particular that ESG regulation will be able to make or break a deal. So either you’re in a good position already, and you buy in to a target that will not destroy your good position, or you are a company in the market who has not done its homework when it comes to M&A and to the big role that insurers and reinsurers will play in moving to clean energy.”

Failure to take the importance of ESG regulations into account in any M&A deals “could damage your business tremendously going forward”, she warned.

More generally, in terms of M&A trends, Barbosa expected 2023 to be a “two-speed market”.

“The big global deals are coming back. We can see activity and preparation that concerns global insurance groups, as well as the big private equity (PE) funds that are ready to compete for certain targets.”

However, M&A in the mid and smaller segment of the market will be less active, she said, adding: “Those entities will still be very wary of spending their money.”

Cross-border M&A activity is predicted to increase in 2023 over 2022, but Barbosa said these deals will materialise in a way that can be reported only in the summer, and into the third and fourth quarters of the year.

Another big driver behind reinvigorated M&A activity is that companies feel that now is the right time for growth beyond what is possible organically.

“We’ve all been treading with little steps forward, a new product here, a new distribution channel there. Quite a lot of companies have been looking at it in the last two years and saying ‘it’s not the right time to do it during COVID-19’, and then ‘it’s not the right time to do it when a war has just started’. But now is the time when they’re saying ‘yes, I want to grow in leaps and bounds’.”

Rising interest rates will boost M&A activity from the PE funds going into the market. At the same time, hard rates make managing general agents (MGAs) and managing general underwriters (MGUs) “very attractive targets” for M&A because it is the right market to try and get as much business as you can, and grow very quickly, Barbosa explained.

M&A cover interest

Bamford leads the team at Liberty GTS that insures M&A transactions and has a different perspective on M&A trends. As an insurer, he highlighted the 2022 Inflation Reduction Act in the US as a cause for a lot of interest and activity among corporates and PE firms.

“They are looking to see how they can use insurance to arbitrage certain positions that they put in their businesses. Carbon credits is a big part of that in the US, so how can they monetise good behaviour and carbon credit acquisition?

“How can they crystallise the value in those credits by using insurance products? That’s one big area of interest in the US,” he said.
Bamford added that there are many other clients which all have interests in products that do very different things, so one theme doesn’t necessarily tie them all together.

He said the reason this is in the interest of insurers is that the broking market has become more attuned to it. “Brokers have seen a drop in submission flows, they’ve worked out that they need to find another revenue stream, and they are now selling these products and being more proactive,” he explained.

For more on M&A trends, how crypto fits into the picture and how much more tolerance the market has for capacity, watch the full discussion above.

You can also read the sister article titled  “Last gasps of M&A ‘gold rush’ alive in clean energy sector”