Intelligence: Broker Focus - No sign of slowdown in broker mergers and acquisitions

Plenty of things have been on hold during lockdown, but insurance broking merger and acquisition activity hasn’t been one of them.

Indeed, Imas’ latest UK Insurance Distribution M&A Annual Review reports a record £10.5bn of activity during 2020 and highlights that, even without including Aon’s takeover of Willis Towers Watson, deals valued at over £5m were still higher than during any previous year (see graph, bottom).

Most interest has been in commercial lines brokers, and primarily those operating in specialist niches. There has also been appeal from firms with interesting platforms or sales technology.

The tendency for aging principals to seek exit strategies has been accelerated somewhat by Covid-19 making sellers more aware of their own mortality, but the primary drivers have been low interest rates, creating low borrowing costs for buyers, and the stability demonstrated by the field during times of economic adversity.

Insurance isn’t one of the first areas most businesses cut back on when the going gets tough because they realise it’s essential and, in certain cases, mandatory.

Some covers may be adjusted downwards to reflect, for example, smaller workforces and fewer miles being driven but the impact tends to be gradual and much depends on the actual length of a downturn.

So there have been no knock-down prices for brokerages during lockdown. Indeed, prices have actually increased.

Rob Galtman, director of the insurance team at Fitch Ratings, says: “Globally the insurance brokerage industry has proved resilient during past downturns, with reasonably stable organic trends. From 2008 to 2010 large brokers only experienced low single digit revenue declines.”

With the exception of areas particularly vulnerable to Covid-19 – such as travel, leisure and sport – this resilience has been abundantly clear during the pandemic. Some adaptions have been necessary, such as substituting virtual or socially-distanced meetings for traditional face-to-face ones, but brokers have generally coped well and life has gone on.

It is essentially a relationship business and long-term relationships with clients and employees tend to survive the hard times.

Howard Lickens, executive chairman of the Clear Group, says: “If you want to sell a decent quality broker you don’t have to go far to find dozens of suitors. A good commercial intermediary will have a lot of loyalty, so you are largely buying a client base. Returns start coming from day one of the acquisition whereas those growing organically have to throw a lot of money at marketing and sales before gradually getting a return.”

A lack of potential downside for the businesses being acquired can easily make it a win-win. They can often continue trading largely as before yet benefit from new distribution opportunities and investment in technology from the parent group and realise valuable career opportunities for owners and their families.

Lee Mooney, UK regions managing director for commercial lines as RSA, says: “The consistent message is that M&A is welcomed by the brokers involved. If you are a regional independent broker and become part of a bigger entity it does give opportunities for career progression.“

All very seamless

The actual integration process also throws up relatively few horror stories nowadays. Although buying a larger business can take years, with a small regional bolt-on everything can be completed within six to nine months.

Mark Flenner, head of UK financial services M&A at KPMG, says: “The mega-mergers involving national brokers are more complex and harder than the mid-market ones but even these have been successful, and acquirers of brokers of all sizes are getting much better. In the old days it would really be run as a federation and be a bit loose but now it’s a lot more structured.

“A lot fewer back office staff are losing their jobs in these deals nowadays as cutting out overlap tends to be more on real estate and IT spend than on people. Acquirers are really keen on retaining talent.”

Buyers have become highly experienced in identifying business owners likely to fit into their organisations and, although most deals are conducted through an adviser, the shortlists drawn up often involve individuals that buyers already know.

Michael Rea, CEO for UK retail at Gallagher, says: “Cultural fit is probably a greater consideration than price in today’s market and it’s important to have conversations with vendors up front about what they actually want to do. Although we try to avoid auctions, we will pay the right price for the right business.

“We walk away from a lot of potential deals that don’t fit strategically or culturally, and we can normally form this judgement very quickly. You need to feel these are people you can enjoy working with in a couple of years’ time and that you can accommodate them.”

Broker M&A activity is also causing minimal disruption to insurers, which volunteer they have been net beneficiaries as a result of dealing with enlarged groups, with integrated understanding of data, and a competitive environment which keeps brokers on their toes.

Allianz acknowledges that operational slickness can improve or deteriorate as a result of M&A and that it is important to stay on top of this issue, but it has never cancelled a specialist scheme or stopped dealing with an intermediary as a direct result.

Simon McGinn, general manager for commercial and personal at Allianz UK, says: “These are relatively low-level issues, although we do have to keep our fingers on the pulse regarding commission levels, which can go upwards if we don’t manage distribution costs adequately.”

Private equity

Although major listed brokers like Gallagher, Aon and Marsh are still highly active, massive impetus has been provided by interest in the sector from private equity firms, which own or provide funding backing for acquisitive brokers.

Rea, says: “Most of the players I compete with to buy brokers are backed by PE, which has clearly decided this is a sector it can make money in. As we are listed, we are buying for the long term but PE is investing with half an eye for an exit in the medium term. So that’s a consideration for the seller.

“Stackhouse Poland and Bollington, two of our deals in the regional space, were both coming out of private equity backing from investors looking to exit.”

As well as being motivated by the availability of ‘cheap money’, PE players have developed a better understanding of the sector’s regulatory oversight.

Paul Jones, partner for transaction services in financial services at PWC, says: “10 years ago insurance broking was the preserve of a few PE players but now broader PE is more comfortable with the sector and its regulatory environment. They were previously quite nervous about it seeming to introduce an increased risk and complexity to the operating model compared to other sectors.”

Can it all continue?

The Imas Annual Review reports there are 2368 relevant authorised businesses remaining and expects this number to decrease to 1918 by 2025. It also identifies 296 businesses with an estimated value over £5m in segments targeted by current consolidators and estimates this could drop to 151 over the next five years.

There is a realisation expressed, particularly by the brokers themselves, that a good thing is never going to last forever.

Stuart Williams, client director at Konsileo, says: “There is a finite opportunity, and money could move out of the sector as a result of diminishing opportunities. Everything comes to an end at some point but there are already plenty of deals already in play which will make it seem that there’s an acceleration.”

However, the consensus view is that current levels of M&A activity are likely to be sustained for the immediate future as demand should remain strong and there are, in particular, still plenty of small-to-medium-sized brokers to acquire.

Hugo Laing, corporate partner in financial services at international law firm Eversheds Sutherland, says: “The available pot is definitely not drying up and, if anything, it’s growing. We expect increased deal volumes this year and we have a lot of transactions on the horizon of various sizes.”

Even optimists acknowledge that, because we are all going to have to pay for the massive governmental support the UK has received during lockdown, appetites to sell could be affected by Capital Gains Tax hikes further down the line. But this would probably be preceded by an Indian summer of activity as sellers sought to maximise their nest eggs between the announcement and actual implementation of such a move.

Rising interest rates resulting from anticipated hikes in inflation are considered a more immediate threat but, even though these would affect deal valuations by making funding more expensive, they wouldn’t necessarily halt activity.

Jones says: “The start of this year has been very busy and I don’t see things drying up at all on either the demand or sell side. There is still significant excess capital out there with, for example, Apax buying PIB Group and HGGC acquiring SRG. We are, in particular, seeing investment come from US private equity.

“Although personal lines has been less attractive than commercial during recent years, I expect increased M&A activity in this area going forward. A number of personal lines models are becoming more digital in nature and more proven in terms of access to customers and gaining confidence from underwriters, making it an attractive sector.”

M&A opportunities abroad

Should supply in the UK prove inadequate, however, appetites to acquire abroad could increase. Although this involves grappling with different distribution, compliance and legal models, the market is far less crowded.

There are already plenty of recent examples of such activity. Last year, PIB Group bought Munich-based Marx Re-Insurance Brokers and Polish brokers WBD, and GRP acquired Crotty Insurance Brokers in Dublin. This February The Ardonagh Group bought Australian broker network Resilium.

Laing says: “This is where Brexit has complicated M&A. Many intermediaries had set up entities in other locations for passporting reasons, but not always in the places where they want to buy a business. So, one of the challenges of cross-border M&A in this market is integrating businesses with different contingency plans.

“But the appetite is there and we have acted for a number of consolidators that have bought businesses located outside the UK, mainly Ireland.”

Insurance broking M&A is clearly on a roll and, judging by the way it has coped with the worst health crisis in over a hundred years, it would be no surprise if it managed to prevent Brexit from being a significant barrier as well.