Opinion paper by Jacques Verlingue, Chairman of Adelaïde Group
Broker consolidation enhances role of Europe’s independents
The pace of consolidation has accelerated in the re/insurance broker market, both in terms of the number of transactions and an increase in the multiples being paid. In this context, it is interesting to analyse the market dynamics and the driving force behind this consolidation.
When a transaction is announced, all parties generally claim the main goals of the deal are to create a combined entity that will be stronger and will better serve its clients, as well as to offer its employees greater development opportunities. These would be typical characteristics of a “love marriage”.
Nevertheless, some observers are increasingly sceptical about these arrangements, pointing out the main driver of most merger and acquisition (M&A) transactions is purely financial and the objective is to quickly realise capital gains through increased revenues and staff rationalisation.
For several quarters, M&A activity has been at a very high level because the brokerage market is experiencing the perfect combination of factors making the case for consolidation : large amounts of capital available, low interest rates, high valuation of brokers’ stocks, valuation multiples at a historic peak and ahard insurance market. In the past, some of the M&A ingredients have been present during a certain period but it is very rare to experience them all at the same time.
In this context, the market is restructuring under the influence of three types of players.
The first group are the global brokers, typified by the (uncertain) merger between Aon (number two in the market) and Willis Towers Watson (number three). Global brokers have been active for decades as they seek to control distribution in the market and access markets, such as small to medium-sized enterprises, which have, historically, been uneconomical for them.
The second group are the brokers that are backed – in whole or part – by private equity funds. In a number of markets, private equity funds have actively sponsored consolidation activities aimed mainly at large and small regional brokers.
The last group of consolidators are the brokers whose capital is owned by families. Most of the time they rank in the top 10 of their respective markets and have also engaged in intensive M&A activity in and outside their home country.
As a corollary to this M&A activity, every brokerage and insurance market has been characterised by a fierce mercato (that is,movements of key employees/group of employees from one entity to another). Talent management is high on all chief executives’ agendas but “lift and shift” operations are sometimes seen as aquick means to move clients and revenues along with the producing brokers. In some instances, the battle for talent is turning into a war, with an increased number of legal disputes between protagonists.
The history of many brokers, especially the biggest ones, is characterised by continuous organic and inorganic growth and the integration of acquired companies, balancing the financial constraints inherent toany M&A operation and the ambition to create a better broker for its clients and its employees.
For clients, the benefits of consolidation are tangible: bigger brokers have increased power to negotiate competitive conditions with insurers. They also have the capacity to invest in digital solutions to improve the quality of service. For employees, there are many positives to consolidation : better packages, international career opportunities, increased professionalism, even if some integrations have led to areduction of the workforce.
However, we believe the recent acceleration in M&A activity has changed the balance in favour of pure financial objectives against the ambition and the capacity to create added value for other stakeholders such as clients and employees. This shift in priorities is easily explained by the increase in financial constraints in recent deals: commitments to significant cost synergies, market and private equity funds’ strong expectations on margin expansion, high debt to equity ratio. In short, some of these deals may be over-leveraged, creating an unsustainable position for the business, its clients and employees alike.
One may consider this is a vested position as we are a family owned broker. However, we strongly believe that family owned brokers have an important role to play in the current wave of consolidation and are strongly positioned to deliver better returns for all stakeholders : financial partners; employees; and, most of all, added value for clients.
Broking, everywhere, not only in Europe, remains a service- driven sector and one in which talented individuals and motivated teams, supported by strong investment in technology, can be highly successful.