Promising signs for insurance brokerage M&A

The global insurance brokerage market was valued at around $US128 billion in 2021 and is expected to grow to $US278 billion by 2030.¹ 

"Insurance keeps the corporate world turning," says Jonny Allison, Head of European FIG at Macquarie Capital. "No company can operate unless it has insurance, so it is the last thing that would get turned off."

For investors and trade buyers, the market is still sufficiently fragmented to allow for a sustained period of deal making and consolidation. 

Solid fundamentals

Following a blockbuster year of insurance M&A in 2021, deal volumes reduced during 2022, with broker transaction numbers dropping by 27 per cent.² This slowdown was very much a reflection of deal activity across all sectors as the world came to terms with increased economic volatility and geopolitical friction.  

Yet insurance brokerage remains the most active segment for transaction volumes within the wider insurance industry with continued interest in managing general agents (MGAs), managing general underwriters (MGUs), and specialty agents.³

Commercial lines brokers have strong dynamics and have shown to be relatively indestructible, having high client retention rates, and strong recurring revenue and low capital expenditure requirements. 

Brokers do not take balance sheet risks in the way that insurers do. If a major event occurs, they work with a client to achieve a satisfactory outcome, but they do not hold the underlying risk that the insurer would have. 

Even in times of financial stress, clients are unlikely to reduce their insurance coverage. Quite the opposite, they are more likely to work with their broker to ensure that they have enough coverage. In the retail segment, there are clear concerns about the cost of living and the impact this may have on a consumer’s ability to meet the expense of insurance premiums, but this does not apply in the same way to the commercial sector. Lloyd’s of London expects top-line premium growth of 14.3 per cent in 2023⁴ as corporate clients assess how much insurance cover they have and whether they are underinsured for new areas of risk.

These fundamentals are naturally attractive to private equity investors, trade buyers and insurance platforms. 

Continuing deal enthusiasm

Deal activity is still strong with financial investors leading the way. Private equity still accounts for the majority of M&A deals in the insurance brokerage market with PE firms accounting for two-thirds of transactions in 2022.⁵  Insurance brokerage is especially attractive to PE firms because of high EBITDA margins, which can be further boosted by further consolidation, according to Allison. Insurance brokers’ stable cash flows gives PE firms greater access to leveraged debt and to achieve better returns. 

In 2022, ECI Partners sold Clear Group, the chartered insurance broker, to Goldman Sachs Asset Management (GSAM); Macquarie Capital advised ECI Partners on the deal. Clear Group has doubled in size every three years and, has completed 10 acquisitions since 2018.⁶  Macquarie had previously advised GSAM on the sale of Aston Lark to Howden, the London-based insurance broking group⁷ (having advised Bowmark on the prior sale of Aston Lark to GSAM). US trade buyers are also enthusiastically targeting the UK and continental Europe, taking advantage of the strong US dollar. Florida-based Brown & Brown’s acquired the UK’s Global Risk Partners (GRP) in July 2022; Brown & Brown is the sixth largest broker in the world.⁸ 

Making sense of a frenetic market

Given the amount of enthusiasm for insurance brokerage as an asset, it is often important for potential sellers to assess who might be the most viable acquirers. Management teams have a business to run and will benefit from knowing who they really need to meet. 

There are many variables to consider, including where a private equity fund is in its fundraising cycle and perhaps whether trade buyers are considering other deals. It is vital to appoint advisers that truly have their finger on the pulse. 

To achieve this, Macquarie has recognised the value of international collaboration between colleagues in the UK, USA, Australia, Benelux, Germany, France and Spain. "We collaborate across teams, regions and sectors. I've done a lot of deals with colleagues in the US, where we've had considerable deal flow between us, and also worked with our teams in Sydney, Australia," explains Allison. "I always say, we're a big firm, but it doesn't feel like a big firm in terms of the route map to get to colleagues." Having the balance sheet to offer debt finance is another important aspect of the Macquarie offering as shown in the recent financing for MRH Trowe in Germany.

Now that travel restrictions have been lifted, the teams visit each other and their respective clients regularly to ensure that priorities and opportunities are identified, and deals are effectively executed. “There’s no true replacement for building relationships face-to-face" Allison says. Last year, Macquarie advised Australia’s AUB Group on its £500 million acquisition of Lloyd’s wholesale broker Tysers from US-based Odyssey Investment Partners,⁹ a deal involving three countries. “We don't see deal activity subsiding. Buyers will be more selective so effective positioning of assets for sale is key, but overall the trend is for more deals, almost for acceleration in Europe as the US and UK consolidation trend spreads. Our ambition at Macquarie remains delivering strategic advice and, where appropriate, investing our balance sheet to achieve the most attractive outcomes for clients."