When will the predator become the prey?

In this week’s Insurance Times ‘Deal Watch’ feature, Jim Keeling, corporate adviser at Corbett Keeling, asks the question of which consolidator in this market will be the first to be acquired.

The context to this is that consolidation in the second quarter of the year has slowed considerably compared with the gold rush of the first when there was a race to exploit the government’s loophole on capital gains tax.

Keeling suggests that there is still a healthy broker market out there and that the incentives to buy and sell remains despite the credit crunch.

He also points out that should any further regulatory burden be placed on the 3,800 remaining brokers it will in turn mean that they struggle with compliance issues and the time effort and costs involved. So the ferocity of consolidators will continue if they can raise the capital to acquire at the same rate and the leverage still secures them sufficient returns from insurers.

And herein lays the clue to who may buy one of the large consolidators. As the market is currently struggling to claw its way out of a soft market how tough will insurers get in the short term? And what aggressive strategies will they take to fight back? Chief executives are talking a good game about reserves drying up and rates having to harden, but are their regional underwriter’s chiefs applying the same principles on the ground?

And if they aren’t, what systems are in place to ensure that they do? Insurers are beginning to push back on consolidators, who, for the first time are beginning to feel the squeeze as their debt financing begins to become expensive due to the credit crunch. So will an insurer snap up a consolidator as a defensive play as they will be able to acquire them cheaper in this climate than any other? Insurers will be assessing the power of consolidators in their book of business and their increasing commission levels as more as a threat than a good return right now.

But what would happen if a leading insurer came along and snapped up Towergate? Would its rivals be forced to in turn take a look at Giles, Jelf or Oval? For a start all the consolidators have investment backers and Giles in particular money has money to burn for the right deal. Meanwhile, Insurance Times reported last month that Oval was looking to refinance and claimed the firm was up for sale.

This position was subsequently played down by the Oval management team, although every company is up for sale of course, at the right price and it is understood that offers were made whether Oval wanted to hear them or not. So which will be the first to go remains in the hands of a bigger question of who would be likely to buy them?

If a specific insurer has the appetite for a deal, or believes that it must take an aggressive, acquisitive approach to this market, it may just in turn spark a further frenzy of deals in this space. But more likely it will be business as usual and another tranche of brokers will be eaten up over the next quarter.

To see Corbett Keeling's quarterly Deal Watch, see this week's Insurance Times.