UK Broker M&A Slows Future Outlook Uncertain
The UK’s general insurance mergers and acquisitions (M&A) market has experienced a slowdown, with deal volumes reaching multi-year lows. Phil Barton, chief executive, Partners& believes there are both demand and supply side issues in the current UK general insurance (UKGI) M&A market, as well as significant macroeconomic and political influences affecting the marketplace.
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From an acquirer’s perspective, multiples remain high for relatively small privately-owned businesses when compared to the publicly listed stock, which are still recovering from the market reaction to the threat of artificial intelligence (AI) disintermediation of commercial insurance broking. Many of the serial acquirers in the sector have significant debt and are potentially constrained in their ability to fund further acquisition activity, particularly when the economic outlook is uncertain and their organic growth objectives are under pressure. The current period of GI market premium softening in the UK has challenged a lot of brokers’ organic growth capabilities and impacted the value of their portfolio, making them more reliant on their capability to deliver new business.
From the supply side perspective, there is no doubt that the middle of the UK market has been hollowed out from many years of consolidation and, as such, there are fewer larger brokers available, meaning that an acquisitive business needs to be highly proficient in integrating multiple smaller businesses in order to deliver value for their own shareholders. Approximately 4,000 UKGI brokers remain independent, but the pool of large and medium-sized acquisition targets has diminished significantly following decades of consolidation, making it increasingly difficult for consolidators to grow efficiently through M&A. UKGI brokers and MGAs are looking outside the UK for acquisition opportunities, which significantly expands the pool of potential larger transactions.
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Partners& remains extremely optimistic about the opportunities for attracting well-run commercial broking, employee benefits and MGA businesses with a track record of strong organic growth and expects valuations for quality businesses to remain strong. In essence, there is a flight to quality, with valuations governed more by metrics such as organic growth, application of technology or AI and culture or specialism. With the potential for capital gains tax (CGT) changes signposted by the new prime minister, I would expect that M&A activity is set to increase over the next six months, given the attractiveness of the fundamentals in our market.
