Insurance M&A continues unabated
Whilst some sectors have been significantly impacted by COVID-19 and the moribund global economy, the insurance sector provides a very different perspective. The large-scale consolidation of the insurance market, which has been running for many years, appears to continue unabated. In the last few months we have seen a number of deals complete in the sector including the GRP searchlight deal, to be followed very quickly by a number of further acquisitions according to CEO Mike Bruce, PIB also bought a stake in Marx Re-Insurance in Germany as well as deals announced by Bennett Christmas, Thompson & Richardson and Castle. Ardonagh, which is backed by significant private equity investors continues to acquire businesses large and small. Private equity equally remains very bullish on the sector with Livingbridge announcing their investment in Chill Insurance in Ireland.
By its very nature, insurance is likely to be less affected by economic uncertainty
This desire to perform M&A is likely to continue for the foreseeable future. Investors view the insurance market as a robust sector and have invested in consolidation platforms, most of which have deep pockets funded in part by significant debt facilities. By its very nature, insurance is likely to be less affected by economic uncertainty albeit there may be some downward pressure on premiums as customers hunt for the best deal. Interestingly, the insurance companies themselves are likely to try to increase premiums to offset losses elsewhere due to the COVID-19 pandemic.
Those insurance businesses serving niche sub sectors where there are limited alternatives available will to some extent resist this premium deflation or will indeed be able to raise premiums and in turn will be extremely attractive to acquirors or investors. Furthermore, the attractiveness of higher margin insurance businesses such as MGAs continues and will no doubt strengthen as acquirors look to bolster their margins. As ever, good businesses with niche focus and high rates of renewals will be very much sought after by a large number of buyers.
For investors seeking a platform in this market there will undoubtedly be a scramble for quality consolidator businesses which is likely to manifest itself in high valuations
Within this sector technology differentiated businesses continue to be of interest. Be it lower cost of customer acquisition, more automated risk management or just more efficient administration – these innovative companies are being sought out by larger more traditional players.
Solid valuations, succession planning by many owners of brokers as well as a tightening of market capacity in Q4 2019 have all helped to increase the supply of targets for these consolidators and there remains a steady stream of bolt-on acquisition targets in the market. What will be interesting is how quickly the consolidators can acquire these bolt-ons and how effectively they integrate them as the consolidators themselves will be thinking about how they crystallise value. It would not be surprising to see some of the larger consolidators undertake their own transactions in the near term, they themselves capitalising on the strong valuations and market demand for insurance businesses.
For those seeking inorganic growth or shareholders looking to crystallise value, the insurance sector looks likely to be a favourable space for some time to come. For investors seeking a platform in this market there will undoubtedly be a scramble for quality consolidator businesses which is likely to manifest itself in high valuations.