After a short lull in March and April, M&As in the insurance intermediary market have bounced back.
Since the start of the pandemic in early 2020 there has been a variety of buyers and the appetite of consolidators and others has remained strong. This trend continued in Q4, with a flurry of deals made public at the end of 2020. And we can’t see any sign of slowdown as 2021 gets under way.
Effects on insurance intermediaries
There has been obvious disruption to the market, with some intermediaries more affected than others. But it’s good to see that the majority have kept their income stable or managed the impacts effectively so that their EBITDA has not dropped significantly.
This has been achieved thanks to effective management of the reduction of underlying insured values through higher renewal rates, and rate increases in many sectors. There has also been reduced expenditure because of reduced travel, furlough savings and office cost reductions.
Along with many businesses from different sectors, our insurance intermediary clients have quickly adapted to working from home and have still been able to provide good customer service.
But, despite the high renewal rates, new business has been a challenge, as intermediaries have found it difficult to get in front of new clients.
Consolidators going strong
What hasn’t changed is investors’ appetite in this sector and their faith in ‘buy and build’ strategies. This is because the investment hypothesis, which has been so successful for many investors, has remained the same and the market has been reasonably resilient.
The end of 2020 saw a number of deals, with consolidators making the majority of the acquisitions. Aston Lark, GRP, Ardonagh and PIB have all carried out a number of transactions. Private equity firms have remained keen to come into the market, with the acquisition of JM Glendinning by Synova of particular interest, after the recent success of their ‘buy and build’ strategy with Stackhouse Poland. We also saw the recent acquisition of SRG by HGGC. And we expect further new entrants in 2021.
Capital gains fears
Owner managers of SME insurance intermediary businesses are looking to lock in their ‘gains’ at the current capital gain and entrepreneur relief tax rates. There’s a worry that these rates may increase in the short term, so this has accelerated the M&A timetable for those already looking at exits. While there have been a number of accelerated sales in the market, this doesn’t seem to have reduced pricing.
Valuations still buoyant
Although the full effects of Covid are still uncertain, we didn’t see any significant reduction in valuations during 2020. Well-run and profitable insurance intermediaries remain coveted assets and this, combined with the high levels of ‘dry powder’ at private equity houses, has kept valuations high.
Distressed assets prediction
Among insurance intermediaries we have not seen a significant number of distressed assets coming to the market. The Government is still supporting companies with financial packages and we therefore expect this situation to continue until mid-way through 2021. Once these government schemes are removed, we may see more of these assets coming to the market.
This article was written by Will Lanyon in our London office. If you would like to discuss the market, or how our Transaction Services team can help you, please get in touch.