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UK insurance broker M&A spree surges on despite headwinds

Takeover activity in U.K. insurance broking shows no signs of abating despite several potential hurdles, those involved in the deals say. But one prominent buyer said the feeding frenzy cannot last forever, as the number of attractive targets dwindles.

Many small U.K. brokers are selling up because their owners are at or approaching retirement age, and because stiff competition and an increasing volume of regulation are making running a small broker harder and costlier. For buyers, organic growth in the mature market of insuring small and midsize companies is difficult, and there is a ready supply of money from banks and private equity houses to fund purchases.

S&P Global Market Intelligence data shows 144 acquisitions announced or completed with U.K. brokers as the target since 2016. Seventeen have taken place since the start of 2018, with a steady pipeline of announcements still being made.

Most recently, Arthur J. Gallagher & Co.'s Arthur J. Gallagher UK Ltd. announced May 9 that it had bought Chester-based broker Risk Services.

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Marsh's £295 million acquisition of Bluefin from Axa, completed in early 2017, is still the most valuable single deal, but three companies — Global Risk Partners Ltd., Broker Network and PIB Group Ltd. — are leading the way on numbers of deals. Formed in 2013 and 2014, respectively, Global Risk Partners and PIB are referred to in U.K. broking circles as the new wave of "consolidators;" groups that exist to buy large volumes of smaller brokers to grow profits and increase their market share and influence.

More to come

According to M&A adviser IMAS, 3,256 companies were registered in the U.K. as insurance intermediaries in September 2017. Buyers are generally looking for brokers that place between £1 million and £10 million of gross written premium annually with insurers, although they will buy larger firms to act as regional hubs, which in turn acquire smaller brokers.

For example, Global Risk Partners's most recent acquisition, Thomas Sagar Insurances, employs 24 people and placed more than £9 million of premium with insurers in 2017. Its most recent regional hub acquisition, County Group, has 278 employees and placed £72 million of premium in its most recent financial year.

Prices vary depending on, among other factors, the quality of the company and the amount of integration work required. A typical going rate is roughly 6x to 8x EBITDA.

The U.K. consolidators still see plenty of opportunity to do deals. Global Risk Partners CEO David Margrett said in an interview: "Given that there are still several thousand U.K.-registered brokers, there is more than enough to see my lifetime out in terms of activity. We are very pleased with the strength and breadth of the pipeline."

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Peter Blanc, CEO of broking group Aston Lark, said the company has "the capacity to do four or five good acquisitions each year" and that the deal pace "is very sustainable because there are still lots of brokers to go after and lots of new start-ups each year."

Not all agree that activity remains high, however. One source with experience of U.K. broking acquisitions, who asked not to be named, said a combination of "Brexit overhang" and the U.K. Financial Conduct Authority keeping some buyers' activity in check is holding back foreign investment. But he added: "If [the uncertainty around Brexit] gets clarified, there could be another burst of inward investment."

In the money

A bigger risk would be if money dries up. Private equity has supported much of the deal-making: Global Risk Partners is backed by Penta Capital LLP, and PIB by Carlyle Group LP. But if better returns become available elsewhere, private equity could turn its back on broking.

Market participants do not expect this any time soon, however. PIB CEO Brendan McManus said: "If interest rates go up, they are going to go up by half a point or maybe three quarters or a point. I don't think that will be enough to cut off the flow of money."

And private equity is showing no signs of falling out of love with the cash-generative and relatively predictable business of commercial insurance broking. Chris Sandilands, partner at advisory firm Oxbow Partners, said: "There is probably half a dozen to a dozen assets on the market at the moment, and there is no shortage of private equity interest in each of those."

McManus added: "The experience I have had in the last couple of years with this business is that we could have funded it several times over."

Another looming threat is the rise of insurance technology startups, which have targeted insurance distribution because it is capital-light and deemed inefficient. But although disruption of broking has been much discussed, it is yet to make a dent.

Sandilands said: "The threats from [insurtech startups] to distribution and the role of brokers has been much less than people expected and much less than in other industries, and so the average broker hasn't really seen any impact in terms of lost business or reduced retention rates."

End in sight?

Although U.K. insurance broking M&A activity has remained resilient so far, the momentum cannot last forever, according to PIB's McManus. He said that of the roughly 3,000 brokers, only around 250 would be of interest to his company.

He said: "There's plenty now, but I couldn't paint an investment story for 10 years to say that is going to continue unless a lot of young people suddenly start businesses, which I think is unlikely."