Acquisitive brokers facing M&A supply shortages

This October’s announcement that Ardonagh has completed its £1.12bn acquisition of PSC Insurance Group certainly constitutes business as usual – at least on one level.

Here is yet another commercial insurance broker falling to one of the biggest 10 brokers – which account for over half of UK insurance distribution M&A.

But, look under the bonnet, and this deal is actually symptomatic of a number of the new trends becoming evident in this space.

As the supply of sizeable UK commercial brokerages is dramatically shrinking, acquisitors are being forced to seek targets overseas, or look at MGAs and wholesale brokers.

PSC Insurance Group is listed on the Australian Securities Exchange – its shares were suspended on completion of the deal, pending removal – and, although mainly a commercial broker, it also has some wholesale and MGA aspects.

Pastures new

According to industry M&A expert MarshBerry’s March 2024 Insurance Distribution Market Report – UK 2023 M&A and Market Structure Annual Review, although commercial lines still accounts for around 70% of sector deals, there are now 390 UK commercial brokers left employing more than 10 staff.

Olly Laughton-Scott, managing director at MarshBerry UK, said: “This year, we’ve reached a plateau, but it’s because of supply constraints, not demand constraints. The private equity interest has been maintained because of a lot of UK-based businesses are expanding overseas.

“For example, only this October, Specialist Risk Group bought a business in Singapore, which is all part of a new trend.

“Historically, buying businesses made money simply because prices went up, but now there is much more emphasis on getting post-deal integration correct. Overseas businesses are probably a bit cheaper, but the price gap has closed quickly.”

According to MarshBerry’s third quarter 2024 report update, specialty distributors – defined as MGAs and wholesale brokers, including Lloyd’s brokers – accounted for four of the seven new deals announced this September – bringing the year-to-date total to 13.

Some acquisitors are also now diversifying into medical insurance intermediaries and even personal lines brokerages.

Clear Group, which has previously avoided personal lines because it involves “needing to be very clever at using data,” acquired a private client broker in one of the 10 deals it was on course to complete during its financial year to this 31 October – with the other nine being commercial brokerages.

Howard Lickens, executive chairman at Clear Group, said: “There is a definite issue with the supply of larger commercial brokerages, but there are still plenty of tiny deals to be had and we are all pivoting our models a little bit and doing things slightly differently.

“I haven’t got the sackcloth and ashes out yet. We have institutional investors, mainly private equity, and their model requires significant growth. A healthy organic growth rate is around 5% or 6%, but private equity investors are probably looking for 25%.”

Size in perspective

This appetite for acquiring smaller organisations among UK consolidators is certainly borne out by MarshBerry’s data for 2023.

“Of course the financials are important and the figures absolutely need to add up, but you need to retain all the talent with the business.”

Although the 148 UK M&A transactions from that year represented the joint highest on record – equalling the number from 2021 – the overall value of sector M&A actually fell by 8% to £3.9bn.

Just under half of those 148 deals involved a target with less than 10 staff – and 89 had a value below £5m.

Size is by no means everything in M&A, and acquisitors commonly volunteer that it is less important than the quality of the business and the cultural fit between the two organisations.

Daniel Cowley, head of M&A for UK and EMEA at Gallagher, told Insurance Times: “When you buy a business you are acquiring the people and the brains in it. To succeed, the leadership team needs a similar mindset to the one that operates in your business.

“Of course the financials are important and the figures absolutely need to add up, but you need to retain all the talent with the business.”

The future

Private equity or private equity backed buyers were, according to the MarshBerry third quarter report update, responsible for 50 of the 105 M&A distribution deals announced in the nine months to September this year.

“Eventually, there won’t be enough fuel to feed the private equity fire, so we will see the consolidators being consolidated.”

How long ever-smaller sizes of deal can continue to satisfy this form of ownership will have an important bearing on rates of M&A activity going forward. So, also, will developments that lie outside the insurance industry’s control in an increasingly dangerous world.

Martin Mankabady, partner at law firm Eversheds Sutherland, explained: “The valuation gap between sellers and buyers has narrowed, which is good news, but any widening of that gap could impact M&A. Inflation coming down is helpful, but any geopolitical or other shocks could rock confidence and make it economically less attractive to do M&A.”

But, even without severe external shocks, Olly Laughton-Scott said the industry would look quite different in five years’ times because of increased consolidation among brokers at the larger end.

He noted: “Eventually, there won’t be enough fuel to feed the private equity fire, so we will see the consolidators being consolidated. This is currently being delayed by the overseas activities.”

Laughton-Scott envisages the ‘big five’ consolidators – PIB, Brown and Brown, Howden, Ardonagh and Gallagher – eventually acquiring the smaller, less dynamic consolidators in the next tier down.

Whether, or when, this prediction comes to pass is for the future, but a constrained supply of acquisition targets in the mid-market will certainly see that capital directed at one end of the market or the other.