Briefing: What impact will Covid have on the big PE-backed brokers like Ardonagh, Hyperion?

By content director Saxon East 

Private equity loves insurance brokers. The latest IMAS review of distribution M&A shows how private equity has fuelled consolidation in the broking market.

The private equity surge is attracted by several factors: brokers having consistent cashflow to service the interest on debts, a bitty broking market ripe for consolidation, a UK government that actively encourages foreign investment, an unprecedented era of cheap debt and ample evidence of peers turning a handsome profit on their investments.

There are a several major private equity-backed consolidators in the UK market such as Ardonagh, Hyperion, PIB an Aston Lark.

So how will the pandemic, the greatest crisis since the second world war, impact private equity’s relationship with broking?

In the short to medium term, it is likely to restrict new private equity entrants into the market.

Many firms have operational issues to sort out and the landscape is too unclear for new entrants to enter right now.

Brokers themselves could face legal action from clients unhappy they were advised to buy business interruption policies that never paid out, creating further concerns for new investors. 

There is also the potential for higher interest charges on debt, as capital providers are concerned of risks with the economy and business.

That could impact the ability of consolidators to raise more debt. The higher interest on debt combined with existing leverage may mean it is not feasible to raise more debt.

Covid upsides 

But there are some real potential upsides to this crisis. 

Consolidators with existing M&A funds may find valuations fall, or at least remain static, with less competition and more bargaining power with selling brokers. 

Another upside is the potential for increased premium rates.

An increase of rates between five and 10 per cent would be a huge boost to the bottom line of consolidators, increasing free cashflow.

Although brokers will be forced to shop around more, much of the rate rises will stick. Brokers will tell hard-pressed customers it is a problem with insurers. 

There is also the potential for more risk assessment and better products suited to cope with the risk of shutdown from terrorism, cyber and pandemics. 

Clients will be more willing to listen to brokers, and for the most savvy, there is the possibility of using fees or service charges to create additional income. 

Coronavirus may have created serious disruption, especially in the short to medium term, but in the long run the bigger brokers and their private equity partners will have opportunities.