Lessons of UK Broker M&A Independence Day Conference 2019 Olly - - PowerPoint PPT Presentation

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Lessons of UK Broker M&A Independence Day Conference 2019 Olly - - PowerPoint PPT Presentation

Oct 26, 2022 258 likes •598 views

Lessons of UK Broker M&A Independence Day Conference 2019 Olly Laughton-Scott, Partner, IMAS Corporate Finance Vienna, 28 June 2019 IMAS Corpora rate Finance Unrivalled M&A expertise in financial services IMAS Corporate Finance UK

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IMAS Corpora rate Finance Unrivalled M&A expertise in financial services

Lessons of UK Broker M&A

Independence Day Conference 2019

Olly Laughton-Scott, Partner, IMAS Corporate Finance

Vienna, 28 June 2019

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IMAS Corporate Finance UK market overview Recent M&A activity and drivers of change Valuations in UK broking M&A The Top 50 UK brokers Impact of consolidation on the Top 50 UK brokers Lessons and implications / the next five years?

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IMAS S Corpo porat rate Fina nanc nce Unrivalled expertise in financial services

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IMAS overview

FOUNDED IN YEARS OF COMBINED EXPERIENCE TRANSACTIONS COMPLETED

1992 >100 ~200

  • Independent corporate advisory firm that has

been owned by its partners since 1992

  • We specialise in providing conflict-free advice on

corporate transactions across the financial services sector

  • Our clients include entrepreneurs, corporates and

private equity firms, for whom we prepare bespoke advice and develop corporate finance solutions that achieve their goals

  • Our highly experienced team have backgrounds at

leading global financial services groups, extensive transaction experience and a track record of success

  • We partner with our clients, managing discreet

transaction processes focused on achieving the best outcomes and maximising value

IMAS at a glance

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IMAS - insurance partners

Olly Laughton-Scott Founding Partner

  • Founded IMAS in 1992
  • Built IMAS database
  • Insurance specialist: > 100 deals
  • Over 30 years’ experience

Tel.: +44 (0) 20 7444 4392

  • ls@imas.uk.com

John Nisbet Partner, Insurance

  • Joined IMAS in 2018
  • ex N M Rothschild & Sons
  • Chartered Accountant
  • 15 years’ experience in insurance M&A

Tel.: +44 (0) 20 7444 4398

jn@imas.uk.com

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IMAS transactions

  • Extensive experience advising on corporate

transactions of every type across the UK insurance sector

  • Completed ~200 transactions in the last two

decades, mainly advising private sellers but also acting for large corporates and private equity clients

  • Particular focus on insurance distribution –

more than 100 completed deals covering personal lines, commercial, Lloyd's, MGAs

  • Deep sector knowledge and data driven

approach underpinned by proprietary database, IMAS-Insight

Selected advisory assignments

sale to sale to sale to Acquisition by MBO backed by sale to sale to sale to sale to

A specialist insurance adviser

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IMAS-Insight

  • Unique internally developed database analyses the

entire UK Financial Services landscape

  • Real time data from FCA and Companies House -
  • ver 30,000 companies classified by activity, size

and ownership

  • Factual data overlaid with >50,000 cross-referenced

qualitative inputs; built up over 25 years – no other adviser has this capability

  • Provides our clients with comprehensive sector

view – every buyer (or possible target) is captured

  • Data ultimately just a tool – backed up by our

sector knowledge and industry relationships

What makes us different

www.imas-insight.com

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IMAS Corporate Finance UK market overview Recent M&A activity and drivers of change Valuations in UK broking M&A The Top 50 UK brokers Impact of consolidation on the Top 50 UK brokers Lessons and implications / the next five years?

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UK insurance broking – market structure (today) …

  • Table above is the ‘tip of the iceberg’ – more than 2,000 firms worth less than £5m
  • Privately held businesses the predominant ownership model
  • Of the privately owned businesses above, 73% have principal shareholder aged 50 or over
  • Fragmented market has proven fertile hunting ground for PE / PE-backed consolidators

Ownership of UK general insurance distribution (>£5m value)

Source: IMAS-Insight

Value band (est.) UK Quoted Privately held O'seas Owned Private Equity Mutual Other Total £100m+ 4 8 12 9 6 39 £25m-£100m 40 8 21 1 1 71 £5m-£25m 247 27 9 1 4 288 Total 4 295 47 39 2 11 398

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… and how it has changed

Number of authorised UK insurance distribution entities

1000 2000 3000 4000 5000 6000 7000 8000 JAN02 MAY02 SEP02 JAN03 MAY03 SEP03 JAN04 MAY04 SEP04 JAN05 MAY05 SEP05 JAN06 MAY06 SEP06 JAN07 MAY07 SEP07 JAN08 MAY08 SEP08 JAN09 MAY09 SEP09 JAN10 MAY10 SEP10 JAN11 MAY11 SEP11 JAN12 MAY12 SEP12 JAN13 MAY13 SEP13 JAN14 MAY14 SEP14 JAN15 MAY15 SEP15 JAN16 MAY16 SEP16 JAN17 MAY17 SEP17 JAN18 MAY18 SEP18 JAN19

Change in basis of UK regulation c.3,000 regulated firms – down from >7,000 in 2005

Source: IMAS-Insight

  • Regulation has made it harder to start a business
  • Restrictive covenants more effective so moving staff

more difficult

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Not all subsectors are consolidating – rise of the MGAs

Number of (all) authorised UK insurance distribution entities and MGAs – past 10 years

50 100 150 200 250 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 MAY09 FEB10 NOV10 AUG11 MAY12 FEB13 NOV13 AUG14 MAY15 FEB16 NOV16 AUG17 MAY18 FEB19

More than 200 MGAs in the UK (right hand scale) excluding Lloyd’s brokers

Authorised MGAs

Source: IMAS-Insight

  • No. of Brokers: >25%
  • No. of MGAs: 50%
  • Insurers struggle to take advantage of opportunities

created by rapidly developing technologies

  • Nimbler MGAs are better structured to do so
  • Over longer term insurers will reduce activities and focus

increasingly on allocation of regulated capital as industry moves from being product-centric to client-centric

Change over past 10 years:

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IMAS Corporate Finance UK market overview Recent M&A activity and drivers of change Valuations in UK broking M&A The Top 50 UK brokers Impact of consolidation on the Top 50 UK brokers Lessons and implications / the next five years?

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Recent M&A in UK broking

UK insurance distribution M&A activity since 2014 – number of deals worth >£5m

Source: IMAS-Insight

2018 a record year for M&A by number of deals

Have the consolidators largely swept up the mid- sized (£5m to £25m value) businesses?

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Deal volumes in last three years driven by voracious appetite of private equity

UK insurance distribution M&A activity 2013-2015 and 2016-2018 – buyers

20 40 60 80 100

UK Quoted Privately Held Overseas PE and PE-backed

20 40 60 80 100

UK Quoted Privately Held Overseas PE and PE-backed £5m-£25m £25m-£100m £100m+

9 4 9 10 27 42 31 90 2013 – 2015 2016 – 2018

Source: IMAS-Insight

For Overseas read: US

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IMAS S Corpo porat rate Fina nanc nce Unrivalled expertise in financial services

  • 200
  • 100

100 200 300 400 500 600 700 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 YTD Towergate / Ardonagh Gallagher Hyperion Marsh PIB GRP Aston Lark

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Dominant buyers change over time – new consolidators active since 2016

Principal buyers of UK insurance distribution since 2003 – annual spend on M&A (£m)

5,000

(Scale adjusted due to relative size of JLT acquisition)

Particular buyers tend to dominate at any one time

Source: IMAS-Insight

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Understanding the Private Equity backed consolidators

  • ‘Buy low sell high’
  • Premium payable for the larger businesses that PE backed vehicles set up to create
  • Take on and reduce or eliminate entrepreneur risk attendant in most small/mid-sized brokers
  • Acquisitions their ‘day job’ – quick decision making and lock in entrepreneurs
  • Create value by institutionalising multiple smaller businesses
  • Confidence around ability to exit
  • Large international acquirers (Marsh, Aon) willing and able to pay a premium
  • Roll up of smaller firms involves a level of work they are not set up to undertake
  • Secondary buyouts (cf. Aston Lark) – as prevalent in the US
  • IPO? – unclear when / if public markets will become relevant again
  • Supportive debt markets (funds) and synergies / operational improvements boost returns
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IMAS Corporate Finance UK market overview Recent M&A activity and drivers of change Valuations in UK broking M&A The Top 50 UK brokers Impact of consolidation on the Top 50 UK brokers Lessons and implications / the next five years?

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M&A valuations – prices paid

0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 16.0x 18.0x 20.0x Nov-10 Sep-11 Jul-12 May-13 Mar-14 Dec-14 Oct-15 Aug-16 Jun-17 Apr-18 Feb-19

UK insurance distribution M&A transaction prices – EV/EBITDA (historic)

Notes: selected transactions where reliable pricing information available (public or proprietary to IMAS); source: IMAS-Insight

Deal value >£100m Deal value £25m to £100m Deal value £5m to £25m Marsh / JLT

  • Avg. 12.9x
  • Avg. 8.7x
  • Avg. 8.9x

Demonstrable premium for scale – validates PE investment thesis Larger deals typically going to trade

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IMAS S Corpo porat rate Fina nanc nce Unrivalled expertise in financial services

4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 16.0x Nov-10 Sep-11 Jul-12 May-13 Mar-14 Dec-14 Oct-15 Aug-16 Jun-17 Apr-18 Feb-19

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M&A valuations – ‘rules of thumb’ …

UK insurance distribution M&A transaction prices – EV/EBITDA

Notes: selected transactions where reliable pricing information available (public or proprietary to IMAS); source: IMAS-Insight

  • Valuations have crept higher and higher
  • Broad range; personal lines typically at lower end
  • ‘Starting point’ used to be 6-8x … now (broadly) 8-10x
  • Larger targets attract double-digit multiples

Higher valuations make it more difficult (or result in greater loss of value) to pass privately owned businesses onto the next generation

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Valuations in context – the listed globals

Five year share price performance – international insurance broking

50 70 90 110 130 150 170 190 210 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 S&P500 WLTW AJG MMC AON

Rebased to 100; source: FactSet

Share prices at all-time highs Outperforming the S&P 500 Record multiples

Company EV / EBITDA Willis 15.5x Arthur J Gallagher 18.5x Aon 17.9x Marsh 18.0x

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IMAS Corporate Finance UK market overview Recent M&A activity and drivers of change Valuations in UK broking M&A The Top 50 UK brokers Impact of consolidation on the Top 50 UK brokers Lessons and implications / the next five years?

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Insurance Time Top 50 Brokers 2018, in association with IMAS

  • IMAS works with the Insurance Times to

produce its annual ‘Top 50 Brokers’ supplement

  • now in its sixteenth year
  • The most widely read publication in UK

insurance distribution; found on CEO desks and boardroom tables across the sector

  • Made possible by a data driven approach /

proprietary database that comprehensively analyses the entire UK insurance distribution sector Insurance Times’ ‘Top 50 Brokers’ in association with IMAS

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5 10 15 20 25 International London Market Commercial Personal 2008 2014 2019

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Viewing consolidation through the lens of the Top 50 brokers

Composition of Top 50 Brokers by Activity (2008-2019)

  • Decline in London Market brokers – many bought by the largest/int’l brokers
  • A number of niche personal lines brokers have grown rapidly in niche markets
  • Growth of Commercial Brokers are the PE backed consolidators
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  • 2
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5 2

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1 2 3 4 5 6 2008 to 2014 2014 to 2019

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Viewing consolidation through the lens of Top 50 brokers (cont.)

Change in composition of Top 50 Brokers by Activity

Commercial International London Market Personal Lines

Source: IMAS-Insight

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5 10 15 20 25 30 Quoted Overseas Private Equity Privately held Insurer Non-insurer 2008 2014 2019

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Viewing consolidation through the lens of Top 50 brokers (cont.)

Ownership of Top 50 Brokers in 2008, 2014 and 2019

In 2008, 48% of Top 50 brokers still privately held Today only 34% and PE is most common form of

  • wnership

Source: IMAS-Insight

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  • 7
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Viewing consolidation through the lens of Top 50 brokers (cont.)

Change in ownership of Top 50 since 2008

Quoted Overseas Privately held Insurer Private Equity Non-insurer

Source: IMAS-Insight

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Viewing consolidation through the lens of Top 50 brokers (cont.)

Ownership by type of business (2019)

2 4 6 8 10 12 Personal Lines Commercial International London Market Quoted Overseas Private Equity Privately held Insurer Non-insurer

Source: IMAS-Insight

Only in Personal Lines is private ownership still dominant

  • Typically services different/distinct markets – limited

costs savings under common ownership

  • Often aggregator focused – volatility of this market

makes them less attractive to PE

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IMAS Corporate Finance UK market overview Recent M&A activity and drivers of change Valuations in UK broking M&A The Top 50 UK brokers Impact of consolidation on the Top 50 UK brokers Lessons and implications / the next five years?

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IMAS S Corpo porat rate Fina nanc nce Unrivalled expertise in financial services

1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

2013 2019

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The impact of consolidation on the Top 50 brokers

Aggregate brokerage (£m) – compound growth of 4.2% since 2003

The Top 50 brokers now control 70% more revenue than they did in 2013 (inflation adjusted) In a low growth economy majority of this explained by acquisition activity

* - UK inflation has averaged 3.0% since 2003

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The impact of consolidation on the Top 50 brokers (cont.)

Concentration analysis – aggregate brokerage %

0% 20% 40% 60% 80% 100% 120%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

2013 2019

A market consolidating – NOT concentrating

Source: IMAS-Insight

Suggests scale does not deliver significant/any operational benefits

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IMAS Corporate Finance UK market overview Recent M&A activity and drivers of change Valuations in UK broking M&A The Top 50 UK brokers Impact of consolidation on the Top 50 UK brokers Lessons and implications / the next five years?

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Lessons & implications

  • Majors buy big, buy infrequently
  • Poorly set up to acquire small businesses (Gallagher the exception)
  • Pay higher prices for scale and absence of “Entrepreneurs risk”
  • Preference for ‘simple’ businesses or those with demonstrable specialism
  • Those that do one or a small number of things well, rather than many things adequately
  • PE back selected teams to do M&A work for them
  • Require scale only few have
  • Lack detailed knowledge of industry or people
  • Good mid-sized businesses in high demand
  • Often as much work for a buyer in a small deal as a medium sized
  • Majors not competing so prices similar to smaller deals
  • Renewal levels are King
  • Personal lines less highly valued as level of renewals typically significantly lower
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The next five years?

  • Importance of technology can’t be underestimated
  • Technology transformed Personal Lines, increasingly impacting Commercial
  • Smaller business more nimble – hence rise of MGAs
  • Technology reduces geographical barriers
  • Evidence that the number of quality mid sized targets beginning to run out
  • PE cash and appetite remain
  • Options for the consolidators (current and future)
  • Acquire a larger number of smaller targets (which involves a lot more work)
  • Slacken acquisition criteria – become less picky about targets
  • Look for new opportunities in other areas
  • More personal lines business?
  • New markets / Continental Europe