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Insurance industry M&A to continue amid capital influx

Global mergers and acquisitions

Merger and acquisition activity in the insurance industry will likely continue apace as capital continues to flow into the sector and inventory remains ample, experts say.

Brokers of a wide variety of sizes continue to attract premium prices and while M&A among insurers may not see many gigantic deals over the next few years, smaller transactions will continue, they say.

The pace of broker deals through the first quarter is about 30% ahead of last year’s first quarter, according to Phil Trem, executive vice president of Marsh, Berry & Co. Inc. in Woodmere, Ohio.

“I think that’s a significant trend,” Mr. Trem said. “Some people question when the music will stop, but we think it’s pretty telling that that’s not the case.”

One day after the close of the quarter, Marsh & McLennan Cos. Inc. completed its previously announced purchase of rival Jardine Lloyd Thompson Group PLC, and numerous other brokerages have announced smaller deals since the beginning of the year.

There are no signs that the pace of broker consolidation will abate over the next two to three years, said Timothy J. Cunningham, managing director of Optis Partners LLC in Chicago.

“At least for the foreseeable future, there will be continued consolidation at a pretty high clip, 550 to 650 transactions per year, similar to what we’ve seen in the last two years,” said Mr. Trem.

Those active in mergers and acquisitions continue to enjoy good access to capital, which is “abundant and relatively cheap,” Mr. Cunningham said.

Capital comes into the insurance sector from many sources, including private equity firms, pension funds and family offices, said John Marra, a deals partner with PwC in New York.

“I’ve just never seen this level of capital and interest in the space,” he said. “The level of capital, the profile of capital, the different investor objectives, is as deep and diverse as we’ve ever seen.”

The ongoing influx of capital will fuel additional deal-making, Mr. Trem said, noting two acquisitive private equity-backed brokers, Alliant Insurance Services Inc. in Newport Beach, California, and AssuredPartners Inc. in Lake Mary, Florida, brought in additional capital.

“Businesses set aside capital to be deployed over the next two, three, five years, so whenever this happens — additional fresh capital — it is a strong indicator there’s more M&A activity to come, at least for the foreseeable future,” Mr. Trem said.

“The continued interest and investment of private equity and private capital dollars into the space is a strong sign for the industry and is a very telling sign that it is still showing very strong fundamentals and is still a relatively sought-after investment opportunity,” he added.

Alliant has grown “appreciably,” and Assured Partners has grown “significantly in some 10 years to $1 billion in revenue,” Mr. Cunningham said.

On the insurer side, more companies have specialized in specific areas over the past several years and sold off noncore businesses, said Mr. Marra.

This has led to “unprecedented amounts of things for sale,” he said, “so you have a perfect opportunity. Capital coming into the space looking for different types of returns, different investment horizons, and your sellers,” Mr. Marra said.

“Where there have been sellers, there will be more, because they now see a path to exiting blocks of business,” such as a variable annuity business, he added. “I think that’s going to continue.”

Valuations in the broker space continue to be rich and have been firming even recently in some segments, on competitive pressures Mr. Trem said. “We see for certain transactions valuations have gone up in the past two months.”

Previously, there had been a larger spread between valuations for agencies with $5 million to $10 million in revenue and brokerages with $25 million to $50 million in revenue. “We’re seeing that spread shrink,” he said. “We are seeing higher valuations for smaller organizations as competition grows more intense.”

But of blockbuster deals on the insurer side, such as the 2016 deal that produced Chubb Ltd., Mr. Marra notes: “Those types of properties — there’s a lot less available than there was 10 years ago or 20 years ago,” adding that many acquirees over the past two to three years have been smaller insurers with “just a couple billion dollars of premium.”

Many acquired companies over the past two to three years have been smaller insurers with “just a couple billion dollars of premium,” he said.





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