It seems not a day goes by without an insurance powerhouse announcing a merger or acquisition (M&A). Consolidation in the North American brokerage space is more active than it has ever been.
Last year was the most active M&A year ever recorded in the United States, with 537 official transactions completed, according to Deloitte. Aggregate deal value dropped 26% from $7.3 billion (around CA$9.35 billion) in 2016 to $5.4 billion (CA$6.9 billion) in 2017.
Average M&A deal value would have dropped as well had it not been for private equity firm KKR and Canadian pension fund Caisse de dépôt et placement du Québec’s acquisition of USI Insurance Services for $4.3 billion (CA$5.5 billion). This deal alone represented 80% of the year’s total announced deal value.
“Growth via M&A has been a principal growth strategy for brokerages for a long time. Consolidation in the brokerage market is not a new phenomenon,” said Boris Lukan, M&A and Restructuring Leader, Insurance, Deloitte. “2017 set a new record for most brokerage transactions in the US market, at least by Deloitte’s account. However, aggregate deal value wasn’t quite as high as some of the previous years because there weren’t as many big blockbuster deals.”
“The scene changed when a number of very prominent private equity firms became interested in brokerage. It’s an attractive business because brokerage tends not to be very capital intensive, it drives a good cash flow, and it throws off some strong returns on equity (ROE). A few private equity firms have made some important investments into brokerage and have worked hard to gain rapid growth of those platforms via acquisitions. The KKR and USI deal is a good example of this.”
Active brokers in North America are transacting three or four dozen M&A deals per year, with some announcing a new conquest almost weekly. Deloitte’s experts predict this trend will continue throughout 2018.
Such a hyperactive M&A environment has caused a lively debate within the brokerage subsector around the relative market position of big brokers versus boutique operations. How can smaller brokerages survive against an onslaught of aggregated powerhouses?
“Within the brokerage subsector, there are always individuals who are entering the marketplace and creating new brokerages focused on unique market niches that might not be particularly well-served. So, while some are being consolidated, others are being created,” Lukan told Insurance Business.
“In general terms, there’s no doubt that larger players are consolidating more brokerage business and becoming a more significant force in the marketplace. Their market power is growing as a result of the consolidation.”
