Broker Times: Last chance saloon

If you’re a broker looking to sell, you’d better hurry and attract some interest from the handful of consolidators still looking to buy. Because this could be your last chance.

How times have changed. In 2001, when the consolidation frenzy began, market conditions had created the perfect storm: capital was freely available at a low interest rate, and there was a surge of brokers nearing retirement. Plus, after more than four years, the market was hardening. That meant insurers were more willing to pay high commissions to consolidators.

But the party didn’t last. After the market peaked in 2005, a soft market hit, and profitability became a problem. Meanwhile, consolidators were leveraging their market share for ever higher commission rates. So by the time the credit crunch hit in late 2008, capital was scarce and insurers could no longer justify paying such high commissions.

With this in mind, brokers might be wondering, did they miss their chance? Is the golden age of consolidation over, or are there still opportunities to sell? The answer, it seems, is a bit of both.

“I think there are fewer opportunities out there,” Allianz director of commercial broker markets Simon McGinn says. “A lot of people who were likely to sell saw valuations two years ago that were very high and that are now no longer available.”

Aviva’s trading director responsible for Scotland and the North, George Berrie, agrees that valuations have dropped sharply. “Consolidators are still buying brokers, but the seller does have to be realistic these days about how much they want for the business in the current climate,” he says.

“Some brokers are probably asking a bit too much for other brokers to be seriously interested in them. So you need to have a realistic price for your business.”

Valuations are usually based on multiples of earnings. At the height of consolidation, valuations could have been based on three times earnings or more. But Berrie believes they are now down to around two times for commercial lines and possibly less than the value of earnings for personal lines.

Opportunity still knocks

Meanwhile, insurance intermediary Cullum Capital Ventures (CCV) chief executive Michael Rea admits consolidation has slowed. But CCV, owned by Towergate chairman Peter Cullum, is proving there are still opportunities, having announced a quartet of new acquisitions in early October.

These included Ainsbury Insurance Brokers, C J Russell, Centurion Insurance Associates, and Knights Insurance & Investment. And Oval recently secured a loan for nearly £10m from insurer RSA as it prepares for a new brace of acquisitions.

“It’s probably fair to say that since the first half of 2009, acquisition activity has slowed down due to uncertainty over access to capital,” Rea says.

“Some consolidators have clearly been in discussions with their banks about getting lines of credit. But we haven’t slowed down; we’ve done about a dozen deals in 2009, and we’ve got a number of other deals in the pipeline, which we hope to complete between now and the end of the final quarter.”

AXA-owned Blufin’s chief trading officer Graham Coates also insists that consolidation isn’t over. Blufin recently announced it was back on the acquisition trail.

“The economic climate has slowed things down but prices have dropped or will drop. Also, the better consolidators needed to take some time out to digest and integrate their various acquisitions. Acquisition growth tends to be quicker and more certain than organic growth, so will continue to be attractive,” he says.

Industry sources agree that CCV and Bluefin, along with Giles, Oval and Jelf, continue to hunt for targets. But they also say consolidation isn’t what it was in its heyday, and there are major doubts over whether it will ever return to what it was.

Don’t blame the crunch

Obviously, the recession has caused a slowdown in acquisitions. But there are other factors at play. Allianz’s McGinn believes consolidation has entered a “more mature phase”, and says consolidators will mimic what the insurers did in the late 1990s.

“[Insurers] started by buying small companies and integrating them. Then they realised the effort to integrate a small company into a big one was not that different from integrating a big one,” he says. “So I think what you’ll see is the number of consolidators overall will reduce, and the bigger ones will get together.”

Coates echoes this theory: “We may start to see consolidators buying the less successful consolidators as earn-outs wash through and we see the extent to which the acquirers have been able to extract real value and increase profits.”

It’s not just a shortage of buyers causing a slowdown in consolidation, however. There aren’t as many sellers.

Coates estimates that there are still around 3,000 to 4,000 brokers in the UK – so plenty of targets, at least for now. But there aren’t as many brokers nearing retirement as there were four years ago.

CCV’s Rea adds: “There was a belief that increased compliance and regulation a couple of years ago would drive consolidation. I don’t think that it has quite had the impact industry commentators thought it would, but it has probably had some impact. And coming out of a recession, that might have impacted some intermediaries who could think this might be a good time to sell up and be afforded the protection of a larger player in the market.”

Top tips

Lower valuations are a reality. But for brokers looking to sell, remember: the best businesses still attract good offers.

“We’re not looking to parachute in a management team to take over an underperforming business and extract value that way,” Rea says. “We’re looking for good businesses with a good management team, and a track record of delivering good results.”

Meanwhile, ensuring that company cultures mesh is also considered key.

“The people who run businesses are entrepreneurs. If they’d wanted to work for big corporations, they’d have joined an insurer or done something different. So inevitably, what’s made them successful with their businesses will make them perhaps feel restrained in a new world,” McGinn says.

Berrie adds: “Managing entrepreneurs is totally different to managing regular broking staff. Unless the leadership of the consolidator wins the hearts and minds of those entrepreneurs, the entrepreneurs will leave. And if they don’t leave physically, they’ll leave mentally, which is probably worst of all for the consolidator because they’re still paying their salary.”

In order to avoid clashes, Rea says buyers should have a flexible approach. If, for example, a vendor is 65 and has run his business for 30 years, he probably just wants to get some cash and retire. In this case, the buyer should get the seller to stay with the business for a year before retiring, so that the seller has time to strengthen the management team.

Or, Rea says, the vendor might be in his mid-40s and not want to retire. So the vendor could sell just part of their company. “We leave the vendor with some interest in the business; sort of a minority shareholding. He continues to run the business.”

Options open

There are also options beyond selling to consolidators. For example, brokers can look to sell to other brokers that aren’t consolidators. Or they can develop their own succession plan by facilitating their own management buy-out.

Aviva is seeking to build alliances with independent brokers by offering them capital.

“We’re not interested in buying brokers; we’ve ruled that out completely,” Berrie says. “We’re not really interested in taking an equity stake either; that would be a very rare case.

“We’d rather lend them the capital and have that paid back to us in full – and with interest – to achieve their aims on independence. So we could help them buy other brokers or, if they want to retire and wanted to support an MBO, it would be good for that.”

At least for the short term, there is general agreement that brokers will still have an opportunity to sell – but how much of an opportunity is anyone’s guess.

Rea says: “I see acquisition activity continuing for the next three years at a reasonable pace, because I think there are still enough players

out there who want to buy businesses. There are still a couple of thousand independent intermediaries out there who, maybe not today or tomorrow but someday, will want to realise the value of their business.” IT