Broker M&A hit record levels in 2021 – but how are the consolidators faring?

The Covid-19 pandemic may have numerous long-lasting effects for the insurance industry, but it certainly has not hit the broker M&A market, which has carried on unabated.

Indeed, a February 2022 report published by advisory firm Imas, titled the UK insurance distribution M&A annual review – 2021, revealed that acquisition deals in the UK insurance distribution sector hit record levels last year, with 145 transactions totalling more than £6bn.

Acquisitive brokers have long been a mainstay of the UKGI marketplace. For example, many broking firms view being snapped up by one of the consolidators as an exit plan for their business once it hits a certain size.

But, with so many deals taking place across the industry, how are these consolidator firms really faring when it comes to financial performance?

To help answer this question, Insurance DataLab has analysed the financial results of three of the largest consolidators in the UKGI market, delving into the key metrics that make up broker performance.

Ardonagh profits on the rise amid continued growth

One of the most famous consolidators in UKGI is The Ardonagh Group – the broker rose to rank within the top three firms in the Insurance Times/Imas Top 50 Brokers report for the first time in 2021.

In its most recent full-year financial accounts, published in March 2021, The Ardonagh Group reported a revenue of £712.6m for the 12 months to the end of December 2020, which represents a 7.1% increase on the £665.5m revenue it reported a year earlier.

Growth in the broker’s earnings before interest, taxes, depreciation, and amortisation (Ebitda) over this reporting period has been more marked, however, rising to £148.2m for 2020 - up from £100.8m in 2019.

The broker has also worked to streamline its operations. While overall costs rose slightly to £660.5m for 2020 (2019: £659.5m), the average cost per employee decreased over that same 12-month period.

The average cost per employee was reported to be £49,564 over the course of 2020, compared to £51,572 in 2019 – this equates to an almost 4% decrease.

Indeed, the broker’s staff costs as a percentage of turnover have also been falling in recent years.

Ardonagh reported total staff costs of £345.3m for 2020, which equates to 48.5% of its overall turnover.

This is broadly in line with Ardonagh’s staff costs equalling 48.2% of its overall turnover for 2019 – but it is much lower than the 55.3% figure the broker reported for 2018, as well as the 58.7% recorded for 2017.

Since these accounts were released, the broker has - of course - added further businesses to its stable.

Its quarter three financial results announcement, published in November 2021, revealed a more than 30% increase in revenue to £675.5m for the nine months to the end of September 2021, up from £519.5m for the same period in 2020.

Meanwhile, Ardonagh revealed that organic growth over that same reporting period had hit 10%.

The broker also confirmed a growing Ebitda - up to £179m for the nine months to the end of September 2021 compared to £121.9m for the same period a year earlier.

When completed acquisitions are added into the mix on a pro forma basis, the broker’s Ebitda for the first nine months of last year increases to £197.5m (2020: £170.6m).

Howden still striking the big deals

Another broker synonymous with consolidation in UKGI is Howden Group.

In the most recent financial accounts for Howden Group Holdings, for the year to the end of September 2020, published in May 2021, the broker revealed revenue totalling £766.4m - up from £714.5m for the previous year.

Despite growing revenue, the broker’s operating profit decreased substantially over the year, falling by almost two-thirds in 2020 to £34.1m (2019: £93.m).

Meanwhile, the broker also reported a declining Ebitda of £118.3m in the year to September 2020 – almost 20% down on the £147.4m reported a year earlier.

Howden reported an average cost per employee of £85,159 for the nine months to the end of September 2020 - up from £80,584 for the same period a year earlier.

Its staff expenses totalled £488.3m, which amounts to 63.7% of its total turnover, according to its most recent accounts. This is up from 56.3% for the 12 months to the end of September 2019.

Since these financial figures were reported, Howden has bolstered its operations, snapping up the likes of A-Plan and Aston Lark. Howden Group chief executive David Howden hopes these deals will help turn the business into “a real UK broking powerhouse”.

A-Plan’s accounts for the year ending February 2021, published last November, revealed a revenue of £109.4m and an Ebitda of £36.3m.

A-Plan also operates from a much lower cost base than Howden, with the broker’s average cost per employee totalling £32,918 for 2020/21 – this is around 61% less than the equivalent metric for Howden Group, prior to the acquisition.

Indeed, A-Plan’s staff costs as a percentage of turnover was also much lower for the year ending February 2021, coming in at 45.4%.

Similarly, Aston Lark also operates from a much lower cost base compared to Howden Group, with an average cost per employee of £50,720 for the 12 months to the end of December 2020. Meanwhile, its staff costs as a percentage of total turnover equated to 58.5% for this reporting period.

It is important to note, however, that Aston Lark also has a number of subsidiary companies that are now part of Howden Group too.

While Howden Group Holdings’ most recent full accounts are not yet available via Companies House, the broker has announced its results for the year ending September 2021. This shows that these recent acquisitions are already having a positive impact.

The broker announced a 48% increase in revenue to £1.1bn, supported by organic growth of 19%.

Add in the acquisition of Aston Lark, which was announced in October 2021 after the end of this reporting period, and the group’s revenues rise to £1.4bn.

Howden also confirmed an adjusted consolidated Ebitda of £335m for the year ending September 2021.

This is up 50% from the previous year, although this is not directly comparable to the unadjusted Ebitda figure of £118.3m that was reported in the broker’s accounts for the year ending September 2020.

Gallagher profits on the rise

Rounding off our trio of blockbuster consolidators is Arthur J Gallagher.

While headquartered in the US, Gallagher is still one of the key acquirers of broking firms in the UK. It says its aim is to support strong organic growth with key acquisitions.

The group’s broking arm in the UK is Arthur J Gallagher Insurance Brokers - its latest full set of company accounts for the 12 months to December 2020, published in October 2021, revealed revenues of £298.2m, making it the smallest of the three brokers comprising this analysis.

Despite its smaller size in the UK, Gallagher still reported a larger profit than Howden, reporting an operating profit of £65.8m for 2020 – up significantly from the £32.6m operating profit it reported for 2019.

This means that the broker’s profit margin shot up to 22.1% for 2020, compared to 13.3% for the same period a year earlier.

Gallagher’s UK broking arm also reported a 2020 Ebitda of £71.5m - up from £36.3m for 2019.

The broker does not publish staff numbers for its UK operations, so it is not possible to calculate the average cost per employee.

It does, however, release staff costs for Arthur J Gallagher Insurance Brokers and this figure stood at £143.5m for 2020 – an increase of 14% on the £125.5m reported for 2019.

This means that Gallagher’s staff costs as a percentage of turnover equated to 48.1% for 2020 – the lowest percentage in this analysis and also lower than the 51.4% Gallagher reported for 2019.

Since filing these accounts with Companies House, the wider Gallagher group has also announced figures for the performance of its UK broking and underwriting arm for 2021. This revealed organic growth of 12% in Q4 2021 – including 7% within its UK retail division.

These latest figures also include figures from other group companies based in the UK.

Gallagher has a number of such subsidiaries, including Pen Underwriting - which recently acquired Manchester Underwriting Management - and Bollington Wilson, but none of these businesses contribute revenues at the level of Arthur J Gallagher Insurance Brokers.

Across all of Gallagher’s UK companies featured on Insurance DataLab’s insight platform, one thing remains consistent, however.

The average staff costs as a percentage of turnover stands at 43.6% - much lower than Howden Group and also lower than the figure reported by The Ardonagh Group.

Gallagher’s profit margin, meanwhile, stands at 20.3%. This is significantly higher than the 7.3% and 4.4% profit margins reported by Ardonagh and Howden respectively.