It has been a quiet few weeks on the insurance brokerage merger and acquisition (M&A) front. The temporary slump in deal activity can be attributed - like many other downturns (economic, mental, business activity, to name but a few) – to the coronavirus pandemic. But this pause in M&A activity may not last for long, according to industry experts.
As COVID-19 forces brokers to engage in digital transformation and conduct more of their business through virtual settings, there are some who are taking a step back and thinking: ‘It would be nice to have a helping hand. We need a partner who can provide financial stability in this time of uncertainty.’ Partnership will likely be the premier driver of broker M&A over the next few months.
“We’re still seeing the M&A conversations and explorations happening,” said Marie Carr, global growth strategy leader at PwC’s US Financial Services Practice. “There are many folks who are still really looking at it. However, you may not see the pulling of triggers on those deals right now because folks are waiting to see how deep the [coronavirus situation] will go. They might be confident in terms of their capital position, but they’re waiting and watching the market for the time being.”
Where Carr expects more immediate deal activity in the distribution space is among those who aren’t able to adjust swiftly enough to the new business environment spawned by COVID-19. She commented: “We’ve seen leading agents and brokers actually intensify [investments] into their digital presence and engage customers off renewal cycle in a process to either provide more service, to provide more policies, to review policies and just be connected in a value-added way. Then, there may be some brokers who fall behind and find that more difficult, but I think they will adjust as well. And in a worst-case scenario, if brokers don’t adjust to the current environment, there will be opportunities to quickly merge with a company that’s already engaged.”
COVID-19 struck when insurance broker M&A was at an all-time high. For the past two years, the industry has seen record-breaking deal numbers in the sector, and, before the pandemic hit, all estimates pointed towards an equally busy 2020. The reasons behind that surge in deal activity are tenfold, according to John Block, partner at the private equity firm HGGC. Successful insurance brokers and agents are seen by investors as “stable, steady, recurring businesses” with good opportunities for organic and inorganic growth, said Block, who added: “Those are things that investors get really excited about.”
When asked whether private equity investors are still interested in the space amid COVID-19, Block replied: “Absolutely. There’s still activity going on. I would characterize it as cautiously optimistic, in that we’ll continue to fight through this pandemic and come out on the other side in a well-positioned space. Our view at HGGC, and I think it’s a consistent view [among private equity investors], is that insurance is one of the stickiest parts of the underlying economy. Businesses will retain insurance for as long as they’re in existence, and as soon as businesses come back to life, they’ll be buying insurance again. It’s a very mission critical element of the underlying global business world and the personal world as well, so we believe it to be a pretty stable and sticky place, hence that cautiously optimistic approach.
“The reason why I use the word cautious is because everyone is cognizant that we’re in a period of uncertainty. As we look at M&A opportunities, we’re certainly mindful of the impact that COVID-19 might have on a business and its exposure to different end-markets. But we’re still very much looking for opportunities to partner with great people, and we’re big believers that in times like this, the leaders that want to join a bigger platform and grow together are still attractive. We’re absolutely open for business and we’re finding that there are businesses out there that are in the same camp and are looking at their businesses saying: ‘We’ve got a great platform. In the face of uncertainty, it might be a good time to de-risk a little bit, partner up with someone, and join a larger platform that can weather the uncertainty better.’ Together, there’s more diversity, stronger financial backing and other things that are attractive to a lot of sellers.”