What the hot M&A market means for buyers and sellers

What the hot M&A market means for buyers and sellers | Insurance Business

What the hot M&A market means for buyers and sellers

Mergers and acquisitions (M&A) in the insurance space haven’t let up this year, with the first nine months of 2018 seeing $39.1 billion in aggregate transaction value, according to a recent report from S&P Global Market Intelligence, giving 2018 the title of the most active insurance M&A year since 2015. There are both pros and cons to this flurry of M&A activity from the perspective of an insurance leader.

“There’s a lot going on in all segments of the industry: retail, wholesale, and carrier,” said Daniel Kaufman, senior vice president of H.W. Kaufman Group and managing director of its subsidiary, Burns & Wilcox, adding that consolidation is happening across the board, and it’s not just the big buying the small, or the big buying the big. “There are positives and negatives to the consolidation. For us, we like to be a consolidator, so we’re always looking at deals from the wholesale space and other services that we’re involved in, but the market right now is so inflated. There’s so much private equity money in the market driving up prices, which I don’t see as being healthy for the market on a long-term basis.”

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H.W. Kaufman Group is no stranger to M&A. Earlier in 2018, it acquired the premium financing company Stonemark, which merged with Kaufman subsidiary Royal Premium to form a new organization under the Stonemark name. When it came to this deal and others, as well as those yet to come, the privately held specialty insurance company has a focused approach to M&A.

“We’re always looking for deals, but we don’t want to make a deal just for growth’s sake or deal-making’s sake. We look at the fit, what does it add to the company, what’s the real reason for it? It’s not just for quarterly returns or to flip it in three years, like private equity does,” explained Kaufman.

The wave of consolidation has nonetheless impacted H. W. Kaufman Group, whether the organization is directly involved in making deals or not. Many of its clients have been acquired and a lot of clients are acquirers, and while there are challenges when a partner is acquired and you have to work with new parents, Kaufman tells Insurance Business, H.W. Kaufman Group can also benefit from M&A because of its position as a large wholesaler.

“We have a lot of relationships with the large retailers that are consolidating,” he said. “A lot of the smaller, regional wholesalers aren’t as fortunate because they don’t have those preferred arrangements, so they might have a smaller regional retailer they’re doing a lot of business with and then that retailer gets bought. They’re not a preferred partner and they lose all that business.”

Insurance isn’t the only industry where M&A activity is taking off, with 2018 setting a new record in mergers and acquisitions globally, which in turn has had implications for the world of insurance. The M&A insurance marketplace has grown quickly – professional services firm and brokerage titan Aon reported this year that the number of insurers offering M&A insurance climbed to 20 in 2018, up from only six in 2014.

Demand for reps & warranties (R&W), litigation, tax and other related insurance offerings is high, as Aon estimated that more than 34% of the North American M&A market (referring to private deals with enterprise values between $25 million and $10 billion) used R&W insurance in 2017 compared to 20% in 2016.

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“It’s night and day,” said Matthew Heinz, senior managing director of Transaction Solutions at Aon. “It’s a completely different marketplace, and an influx of capital and appetite has been nothing but positive for our insured clients. It’s driven pricing down, it’s driven retention down, and as pricing retention has gone down on reps & warranties insurance, which is the bread and butter product of the industry, all of that business has proved to be a little bit of an engine for expanded appetite in other areas, like tax insurance or contingent liability insurance around heightened or specific risks identified in a due diligence process.”

The solutions in the M&A insurance market are key to protecting companies involved in deals from unexpected issues that can arise during or after a merger or acquisition.

“On the negotiations front – and this is the reason reps & warranties insurance has grown the way it has per the report – buyers and sellers are extremely focused on allocation of risk for unknowns and for matters that come up post-closing that indicate the business may not have been worth what the buyer paid for it,” said Heinz, adding that dealmakers see benefits by taking that risk and allocating it to the insurance market instead of retaining it, which helps them get out of a deal quickly and cleanly, if need be.

“After the deal is done, [during] integration, there’s a whole host of risks that can pop up: cyber, product liability, assessing financial statements and accuracy of financial statements. It’s just a litany of things that can create an issue,” explained Heinz.

A rise in the number of carriers playing in the M&A market combined with an increase in capacity is a positive development for insurance companies in this space, as well as their clientele.

Read more: ‘M&A not a fundamental challenge to our business model’

“A few years ago, we couldn’t handle deals that were either too small or too big. The carriers were playing in the middle market, so deals between $100 million and a billion dollars in enterprise value, and if you went above that or below that, it became much more challenging to find carriers with the bandwidth to do the smaller deals or the capacity and the underwriting appetite to do the bigger deals,” said Heinz.

“Now, we’ve got some carriers who focus intently on that lower end of the market and the deals below a $100 million in enterprise value or even below $50 million in enterprise value. We’ve got over a billion dollars of capacity available in the marketplace to service the larger deals that are above a billion in enterprise value. The influx of carriers that we’ve got has really opened up the aperture for our marketplace.”