Unpicking a record-breaking year in insurance M&A

Mergers and acquisitions within the insurance industry have accelerated over the past few years, profoundly reshaping the European and London markets. But 2021 saw a particular spike in activity across the region, with M&A deals in the insurance sector up 33 percent on the prior year.

FTI Consulting’s European Insurance M&A Barometer showed that the DACH region (Germany, Austria and Switzerland) was the most active marketplace in continental Europe during 2021, followed by Benelux. While deal volumes decreased in France and the Nordics, both accounted for some of the year’s largest transactions, such as the sale of Aviva France to the Aéma Group in September.

Speaking on the webinar, André Frazao, head of insurance M&A in EMEA at FTI Consulting, said that the UK and Ireland still topped the list, with an increase in deal volume of 40 per cent compared with 2020. He explained that economic conditions, largely brought about by the pandemic, had fuelled activity.

“2021 was an optimal environment for insurance deal-making, as a result of strong lending markets, willing sellers, increased funding and massive economic stimulus,” he said. “Private equity appetite for insurance also remained high across the board, with a greater deal size, capacity and more transactional funding.”

The insurance sector was notable among European M&A figures more widely too, accounting for a sizable proportion of all deals made throughout the year.

“We all know that insurance investors have long been attracted to the low capital requirements and the scalability of insurance, distribution and services business,” continued Frazao. “So, no surprise this sector accounted for most of Europe's yield volume last year, with an increase of 40 per cent compared with 2020.”

Evidently, in the low interest rate environment and with pressures on premium revenues, insurance companies are increasingly opting to grow by acquisition.

“There is an increased focus on trying to create shareholder value where it’s been quite tough in the underwriting world to make money in recent years because of the soft market,” said Peter Rutland, managing partner at CVC Capital Partners.

“After years of inaction, [some companies] are looking to either dispose of businesses, dispose of books of business, or trying to reconfigure their own businesses to disaggregate the distribution away from the asset holding and the balance sheet heavy parts of the business.”

David Howden, CEO of Howden Group, added that consolidation among brokerages had been rife in 2021, and while pricing had certainly been a driving influence, some smaller companies were increasingly looking towards M&A to bolster their competitiveness.

“To be relevant and compete, [some companies] need to tie up with a broker that's got the skill sets, to bring in a specialty, to bring in the placements internationally, to do all those things that, to be blunt, they need to do to compete with large US PLCs,” he said.

The panel agreed that rate declines and recessionary influences have made organic growth more challenging, forcing some businesses to look elsewhere for growth. Yet Howden added that with the diminished pool of businesses to buy, companies need to be aware of other value creation metrics; one being to grow the businesses they buy.

Indeed, with growth by acquisition being the primary aim for some companies, the longer-term compatibility and strategic objectives attached to a new business acquisition can sometimes be less scrutinised.

“You’ve got to look at why you're buying the business in the first place,” Howden said. “Are you just buying because it makes you bigger and there are multiple arbitrages or some sort of early cost synergies? Or are you buying because you think that together, you can grow faster, attract new talent, and build a business around it?”

“Cultural fit” is therefore also essential and is one of the key longer-term considerations according to Nick Triggs, Senior Advisor at FTI Consulting.

“The person, the team, the company you're buying still owns itself in so many ways,” he said. “They're going on the journey with you, and they believe you can give them something they don't have. You can create the win-win.”

Though private equity houses accounted for many transactions within the insurance distribution market, Howden added that they were actually net sellers of brokerage firms for the first time ever in 2021; a trend he expects to continue.

“[Private equity companies] have dropped their average hold time from five years to sometimes two,” he said. “I think they are looking in the crystal balls and perhaps are not so convinced that the value creation models that have existed over the past ten years are going to exist in the next ten years.”

Rutland agreed that from a private equity perspective, it will be interesting to see what trends develop in the space over the next few years. To date, private equity houses have seen the distribution market as an attractive place to invest given the highly recurring, cash generative and strong margin nature of brokers’ businesses. Yet in the context of a recession, this could change, and remains an unknown variable.

“We haven't had a period where there's been a very substantial recession,” he said. “Or indeed, a period where we've had a real shortage of capital that could cause some challenges around access to capacity for the distribution market.”

He added that management is a key consideration by private equity houses too when considering which businesses to buy.

“The most important thing is being able to put your company under the leadership of a world-class management team,” he said. “A management team who've done a good job of getting to a certain size and taking that business to a much more strategic, innovative and faster-growing level, based on truly world-class capabilities.”

In terms of the outlook, 2022 is already shaping up to be another strong year for insurance M&A according to Frazao.

“Even as we approach the end of the first quarter, insurance deal volume has remained incredibly high,” he said. “Which supports theories that this trend looks set to continue.”

In the Lloyd’s market, where top-line growth is improving yet efficiency and scale are not coming through, Jeremy Riley, Managing Director at FTI Consulting, believes that we may see the market starting to benchmark itself against global competitors that are operating more efficiently.

“Some are going to conclude that scale is important,” he said. “Mergers and acquisitions are going to be required to drive down the cost base.”

Though some in the London market have been more sceptical in the past about how effective M&A is at improving performance, Rutland added that the harder environment might push them to think about it in a different way to drive success.

“If you are thoughtful about how you can maintain talent, but at the same time really push to reduce some of those fixed costs, you can unlock a bigger balance sheet to double down on risks where you'd like to have greater firepower,” he said. “In this slightly harder environment, it could be a good time to consider such things.”