Throughout the whole of 2019 and the vast majority of the first quarter of the current year the insurance M&A market had been the strongest that many of us can remember. Intense competition for high quality businesses matched with a shortage of independent operators of sufficient scale, had led to growth in profit multiples and increasingly ambitious and attractive deal structures. A seller’s market that had shown no signs of slowing down.
And then the world changed.
Warnings and general news coverage of the spread of COVID-19 had been filtering through since late January 2020. However it was only during March that we started to realise the health, economic and social challenges that lay ahead as the extent of the outbreak and the threat to life it presented was laid bare.
The escalation of the issue in the UK and its impact on the country in such a short space of time was unimaginable even at the beginning of the month. As the economic realities became clear many in the retail insurance industry were engulfed in calls from clients and anxious policyholders all trying to make sense of their coverage. Many smaller brokers were pushed to operational limits to meet the demands of their own clients whilst also trying to face up to the issues becoming apparent in their own businesses.
Against this backdrop it was no surprise to see many aspects of the insurance M&A market judder to an emergency stop.
Insurance itself is designed to manage exposure to risk and protect against the impact of unforeseen events. However whether policies actually provide pandemic cover, and the impact for insurers relating to business interruption claims, is likely to remain an area of contention for some time.
As an industry, insurers are also exposed more than most to the volatility that we are seeing in the financial markets. As parts of the insurance sector come under fire for their handling of the current crisis, the industry will continue to play an integral role in risk management during these times of economic uncertainty, whilst the Government increasingly adopts the role of “insurer of last resort”.
It is difficult to say with any certainty exactly where we will land when the wheel eventually stops spinning. There is certainly the potential for smaller insurers with specific sector exposures to be hit very hard and for a resulting reduction in underwriting capacity in segments of the market. This has a knock on impact for brokers who may find it increasingly challenging to secure the right levels of cover for clients at a time when cost will come under increasing focus.
In the immediate COVID-19 dominated future and once some form of normality has been restored to the economic landscape, brokers will be faced by at best a static revenue line. Clients facing their own challenges may be resistant to changing brokers during such turbulent times and a period of financial duress could lead to a natural attrition in the scale and economic value of a broker’s incumbent client base.
In market conditions where organic growth is at its most challenging, the attractions of a successfully executed M&A strategy shine bright. Particularly in a market where there may be downward pressure on prices and opportunistic purchases. This will be especially relevant for the many private equity and institutionally funded broker consolidators and platforms that have dominated much of the M&A market in recent years.
With huge reserves of dry powder from funds raised, and a need to deploy capital at pace to both stimulate growth in equity value and raise new funds, it will not be long before the M&A machine once again moves up through the gears.
The well-established regulatory, demographic and financial drivers for consolidation across the intermediary sector remain. And whilst there may be a pause for breath as buyers enter the remission stages post COVID 19, it would be no surprise to see the M&A market in this sector make a full and speedy recovery.
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