Despite high inflation and increased capital costs, the rate of merger and acquisition (M&A) transactions in Europe’s insurance broker markets soared in 2023 and into the first half of 2024. This trend looks set to continue as the cycle of interest rate increases in Europe is ending, making capital easier to access, and could have a positive impact on M&A activity. In June, The European Central Bank (ECB) announced it would cut its main interest rate from 4% to 3.75%. This will potentially contribute to the longer-term positive secular trends around consolidation in the European insurance distribution sector.
The ECB decided to cut rates in June, despite a rise in euro zone inflation, which rose to 2.6% in May, from 2.4% in April. European Central Bank President Christine Lagarde commented about the eurozone’s economic outlook: “Our overall confidence in the path ahead has been increasing.” But she noted risks from geopolitical tensions, extreme weather events and climate issues as concerns. Chief European economist Katherine Neiss at PGIM stated that she was reasonably confident the ECB would cut rates more in H2 2024, which would equate to rates of 3.5% or lower by the end of 2024.
As interest rates decrease and the cost of debt goes down, acquisitions tend to become less expensive, with a positive impact on the return on investment (ROI) for buyers. For private equity (PE) firms, changes in interest rates impact their cost of capital. As interest rates decrease, this reduces the cost of borrowing for private equity companies, impacting the IRR (internal rate of return) on investments. Furthermore, as borrowing costs are reduced, buyers have more flexibility to take on debt for acquisitions.
Secular market trends remain in place with private equity (PE) as a primary driver
The long-term potential for consolidation in Europe’s insurance broker market is primarily driven by the attractiveness of the broker business model, the industry’s fragmentation and a generational transition from founders to non-family management. Traditional insurance brokers all over Europe are grappling with increasing compliance and digitization pressures, demanding investments they are reluctant to make due to their limited management horizon.
Over the past several years, the appeal of the insurance broker business model has drawn a substantial influx of private equity (PE) into the sector. Insurance brokers looking to expand through acquisitions or ready to sell can easily find investors eager to enter the industry. As a result, prices for insurance broker firms have increased significantly.
PE-backed brokers and PE buyers are the key drivers of M&A activity, accounting for 60-70% of European transactions. The transaction volume of European PE-backed insurance brokers has increased tenfold over the past decade. Sponsors are now overtaking corporates as the dominant acquirer of European–based brokers via the number of transactions, driven by growing and record levels of dry powder.
PE involvement broadly falls into two categories. The first are sponsors acquiring a broker business as a one-off, either wholly owned or with co-investors. The second category involves sponsors acquiring a broker as a portfolio company and then using it as a platform for a roll–up.
In the latter case, often referred to as “buy and build,” the primary goal is to accelerate growth and enhance the value of the platform company by creating a larger, more diversified company with enhanced market presence starting in domestic markets and possibly scaling to international markets. This method of financial engineering, along with multiple arbitrage, brings down the firm’s cost of acquisition, while putting capital to work and building additional asset value. The most effective buy and build strategies assume that the platform company’s free cash flow will fuel new acquisitions.
Executing a roll-up to create a larger platform, with the support of leverage, is a well-established private equity playbook across many industries. The European insurance distribution market seems ideally suited to rampantly implement this playbook, as it provides an ample supply of acquisition targets and a stable environment in which to pursue them.
Building pan-European leadership
The M&A market for insurance brokers has been largely shaped by several waves of consolidation in the U.S. and in the UK that began more than 10 to 15 years ago. Massive capital inflows have driven M&A activity in these key broker markets, and these trends continue unabated, as there are still a significant number of independent brokers. MarshBerry’s monthly M&A updates consistently report transaction volumes above the long-term average. Since 2013, M&A deal activity has seen a 10-year CAGR of around 10%.
In continental Europe, the pace of consolidation varies among countries, influenced by the market share (share of wallet) of insurance brokers in general, as well as the presence of local consolidators and cross-border platforms. In countries such as Germany, France, Spain and regions such as the Benelux and the Nordics, consolidation is actively progressing, with an increasing emphasis on establishing pan-European leadership. In many continental European countries, however, there are still ample opportunities to gain a first-mover advantage by acquiring a platform company and employing buy and build strategies to establish leading positions.
In early March 2024, a notable example was the merger of Belgium-based insurance broker Induver and Clover, with investment fund Hg Capital acquiring a stake in the merged entity. The objective is to “turbocharge” the combined and complementary businesses, consolidating the fragmented Belgian broker market through both organic growth and strategic acquisitions. Another significant event in 2024 was Corsair Capital acquiring a majority stake in MJM Holdings, a prominent Polish commercial line broker. This move also aims to establish a platform for further expansion into Eastern Europe.
The price points for M&A transactions are extraordinarily high all over Europe, with multiples for the best performing platforms reaching 15 times EBITDA (earnings before interest, taxes, depreciation, and amortization), and the definitions of EBITDA being broadened at the same time. PE-backed brokers and PE buyers are willing to dig deep into their pockets for local champions, aiming to operate ahead of the consolidation curve within specific European countries or regions.
The valuations of insurance broker firms are likely to remain robust. However, there is an emerging bifurcation in valuation between firms with strong management, high margins and a track record of strong organic growth, versus firms that still have significant improvement potential.
Projections for Europe in 2024
Moving towards mid-year 2024, it appears that 2024 could potentially become another record year in M&A activity. While the exact future is uncertain, favorable tailwinds such as lower interest rates are indicating the potential for accelerated consolidation in 2024 and beyond. There is a potential for both buyer demand and seller supply to increase in 2024, with valuations remaining at or near their elevated levels.
In Europe, it’s striking how quickly the playing field of M&A activity is broadening, with strategic moves occurring for both retail insurance brokers as well as specialty brokers (delegated authority firms and wholesale brokers). Consolidation is no longer confined to just largest and relatively accessible European markets like the UK, Germany, France, Spain, the Nordics, and the Benelux. M&A activity is being seen from retail brokers to specialty brokers in a wide range of countries across Europe. No matter the region or the subsegment, there are paths to strategic growth and “buy and build” strategies everywhere.
