December 4, 2021

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Warnings of market peak amid wave of ‘hot’ insurance broker deals

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Jim Campion seems to have caught himself off guard by how he’s dealing with the agreed sale, announced on Monday, of his Campion Insurance brokers business to UK-based insurance intermediary PIB Group.

“The last week has been a little bit emotional, with all kinds of things going through one’s mind,” Campion said on a joint video call with his new boss, PIB chief Brendan McManus.

“It was a family business. We made all the decisions for the past 37 years and you feel it’s the end of that chapter. But we’re now starting another one. We’re really excited about the future.”

Founded in 1984 by the businessman and his wife, Margaret, as a small outfit in Urlingford, Co Kilkenny, the business has become one of the largest brokers in the Irish market, with 180 staff across 12 offices, writing about €80 million of gross premiums.

Commercial insurance makes up half its business, with personal coverage 35 per cent and the remainder in financial services, mainly life insurance and pensions.

Industry sources have put the deal at more than €70 million, about 10 times its estimated €7 million current annual earnings before interest, tax, depreciation and amortisation (ebitda). The Campions are understood to be taking a small stake in PIB as part payment.

PIB Group entered the Irish wholesale insurance market in late 2017 through the purchase of Citynet Insurance Brokers, a Lloyd’s of London broker operating in the UK and Irish market. It followed up in 2019 with the purchase of another wholesale intermediary, Optis Insurance.

It entered the Irish retail market in April with the purchase of Wexford-based broker Creane & Creane Insurance and followed up last month with the agreed purchase of Waterford-based Oliver Murphy Insurance.

“But the business that we really wanted to invest in was Jim’s business because we think that is a fantastic platform in Ireland, and a fantastic platform to embark on an even more ambitious programme of investment,” said McManus.

The Campion founder and his management team are staying on.

“I turned 60 this year. Every time I pass a nought I believe I should re-evaluate life,” said Campion. “But I will be around here for six, seven years, or maybe more. While I feel I can add value to the business I have no problem in working away.”

Flurry of deals

Campion, one of the largest independent brokers in the State, is the latest to be caught up in a flurry of deals across the industry over the past five years, belatedly following waves of consolidation in other markets, not least in the UK.

The ultimate backers of most of the purchasing vehicles are private-equity firms, sitting on a wall of cash in an era of cheap and easy money.

However, some, such as Conor Brennan, chief executive of Arachas Corporate Brokers, one of the most acquisitive Irish broker groups in recent years, are beginning to call time on the current wave of deals. He says valuations have got out of hand – especially as market interest rates are beginning to push higher in anticipation of central-bank moves to rein in global inflation, which has reared its head this year.

PIB Group was set up in 2015 with the backing of US investment giant Carlyle Group and embarked on a drive of more than 30 acquisitions before London-based private-equity firm Apax Partners took a controlling stake in the business earlier this year.

The attraction for private equity is obvious: insurance broking is a fee-based business that delivers steady revenues through the economic cycle, and strong cash flows that allows buyers to service the debt needed to finance further deals.

Sectoral consolidation among top-tier global corporate insurance brokers has also been a major theme in recent years. New York-based Marsh McLennan purchased UK peer Jardine Lloyd Thompson for $5.7 billion in 2019.

In July, Aon, which is registered in Dublin but run out of London, and Irish-domiciled Willis Towers Watson planned a $30 billion (€26.2 billion) tie-up that would have created the world’s biggest insurance broker but that was abandoned after the US government sued to block the combination.

Willis Towers Watson was formed through a $18 billion merger in 2016.

Private-equity investors

“Private-equity investors see insurance distribution almost as an annuity business,” says McManus. “Even in the depths of Covid, people still had to renew their insurance policies, they had to insure their properties or their vehicles. Those private-equity businesses that haven’t got an insurance broker in their asset base would really love one right now.”

Owners of brokers, on the other hand, have been tempted by the strong valuations being achieved in the industry, amid issues over succession planning in many businesses, and the prospects of scale offering opportunities for back-office and compliance savings in an era of growing regulation.

Brokers Ireland, the industry representative body for insurance and financial intermediaries, estimates that insurance brokers account for 340 of the organisation’s 1,200 members. Its director of general insurance, Cathie Shannon, says “over-regulation” of the sector and well-aired difficulties that brokers have had in securing liability insurance capacity in recent years in the areas of leisure and hospitality has also been weighing on members.

“And as a representative body what we want to see is proportionate regulation which protects consumers but also takes account the low level of systemic risk that we’re exposed to,” said Shannon. “It’s not just the volume of regulation. It’s the fact that new regulation is coming along all the time, with very little regard for what’s already in place. That’s a very significant burden, particularly on smaller groups with fewer staff members.”

Dealmaker

The most active dealmaker in recent times has been Arachas, whose name is Irish for insurance. Established in 2003 through the merger of Cork-based broker Tyrrell Coakley with two Dublin-based peers, Hodgins Percival and Slattery Jermyn, the company ramped up acquisitions in the wake of a management buyout deal backed by UK private-equity firm Sovereign Capital in 2017.

The Irish brokerage group was itself snapped up last year by larger UK peer Ardonagh Group – itself backed by US private-equity houses HPS Investment Partners and Madison Dearborn Partners – for about €250 million. The transaction was based on a multiple of 14.5 times ebitda, according to industry sources, due to its position in the market and platform.

Arachas has continued, since its takeover, to mop up brokers, including education, sports and events specialist O’Driscoll O’Neil and Waterford-based Hooper Dolan, with the consideration for the latter believed to be more than €60 million. Arachas now writes close to €360 million of premiums in the Irish market.

Private-equity firm MML Growth Capital Partners Ireland has also dived into the broker space in recent years using a vehicle called Innovu, initially to take a stake of about 75 per cent in Sheridan Insurances in early 2019.

It has gone on to wrap up four other purchases, including Wexford Insurances, one of the State’s leading equestrian insurance brokerages, and Goggin Insurance Brokers in Munster.

Innovu now has more than 140 staff and expects total written premiums for the year to come to about €67 million. The group, led by chief executive Ronan Foley, has stated that it wants to grow over the long term to become a business with €250 million-€300 million of premiums.

British broker Aston Lark also got in on the action in 2019, buying Dublin-based Robertson Low, which was established in 1995 and was Ireland’s first fully licensed Lloyd’s broker, and Wexford-based Wright Insurance Brokers. It has used the merged entity Aston Lark Ireland to carry out a slew of acquisitions, including seven so far this year.

Wall Street investment bank Goldman Sachs took control of the wider Aston Lark group in 2019, before agreeing last month the sell it to Howden, an international insurance broking group, for a reported £1.1 billion (€1.3 billion).

Elsewhere, UK private-equity firm Livingbridge acquired a majority stake in Chill Insurance last year in a deal that is said to have valued the Irish business at up to €100 million.

Broking business

At the other end of the scale, fledgling Irish private-equity firm Melior Equity Partners ventured into the broking business over the summer for its first investment, taking a majority stake in Dublin-based BHP Insurance, which specialises in covering not-for-profit organisations. The deal helped BHP acquire another broker, Keegan Meredith & Williams Insurances.

Melior co-founder Peter Garvey is no stranger to the industry, having previously worked for the Carlyle Group, where he led the Carlyle Cardinal Ireland Fund’s 2016 purchase of roadside assistance and insurance intermediary company AA Ireland. He managed the fund’s subsequent sale of AA Ireland last year – in a deal worth more than €240 million – to Further Global Capital Management, a US private-equity fund led by former French president Nicolas Sarkozy’s half-brother.

“Despite the consolidation that has gone on, the industry still remains fragmented. Our research shows that three-quarters of the owners of Irish brokers are over 50 years of age – and half of them are over 60. It’s a demographic that’s ageing and looking for solutions. That’s driving a lot of [merger and acquisitions] activity,” Garvey said.

He said his firm is in talks on a “number of bolt-on” purchases. “We’re a bit more flexible than potentially some of the larger consolidators in terms of deal structure. Some owners want to stay on and work for the next five or 10 years and work closely with their clients, but just want to de-risk at this stage,” he said. “We’re interested in smaller brokers. Most of the big guys are not terribly interested in anything that is generating below €1 million in profits.”

Commissions

For Peter Boland, director of Alliance for Insurance Reform, the raft of deals in the sector suggests that brokers are part of the problem, alongside insurers and lawyers, of the “crippling costs” of coverage in the State in recent times for business and households.

“It would appear that brokers are doing exceptionally well out of the current crisis,” said Boland. “The experience of our members during Covid has been that many stood full-square behind underwriters last year when their clients’ business-interruption coverage claims were being denied. It was very clear that these brokers did not necessarily see their clients’ interests as a priority but, rather, the commission check from underwriters.

“Still, it has to be said that there were honourable exceptions of those who backed their clients. “

Following on from landmark Irish and British court rulings earlier this year and pressure from the Central Bank for insurers to pay out on contracts where it was unclear whether businesses were covered for interruption as a result of Covid restrictions, underwriters operating in the Irish market had paid out €130 million on such claims as of the end of September.

A Central Bank report in July on the public liability, employers’ liability and commercial property insurance sectors showed that broker commissions had risen to the equivalent of 14 per cent of gross earned premiums in 2019 from 8 per cent in 2009. An earlier report on the motor sector pointed to a commission rate of 12 per cent in 2019.

Brokers say they more than justify their fees due to the volume of work that now goes into researching the market for clients, preparing paper work on contracts, and dealing with regulation and compliance. “In addition, brokers now do a lot of the work that insurers would have traditionally attended to,” said Shannon of Brokers Ireland.

Back at Arachas, Brennan thinks that consolidation in the industry at a tipping point.

“I think the multiple inflation has reached a point where I think the first wave of consolidation is done and the market is probably at its hottest now,” he said, referring to the fact that brokers are now being sold at between eight and 10 times ebitda, up from about five to six times five or six years ago.

“There aren’t a huge amount of assets left to buy of size and scale. We’re probably out of the Irish market now at this stage unless something really interesting comes along,” said Brennan, who has been given the additional task at Ardonagh in recent months of scouting continental Europe for deals. “The prices being paid now here are prohibitive from our perspective.”

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