There is a clear trend in our sector of general insurance (GI) brokers acquiring employee benefits (EB) intermediaries. This began in earnest in the UK with Aon Risk Solutions acquiring Lorica in 2014, and includes other high-profile transactions such as the one I was personally involved with when Marsh bought Jelf in late 2015. Further examples from the last 12 months include Chase Templeton, THIG and I2 Healthcare. What is important to recognise, in this context, is that Lorica and Jelf were acquired by what are primarily the general insurance arms of Aon and Marsh & McLennan.
This is not just a UK trend though, as international M&A is now focused primarily on health and protection brokers and platform providers.
So what’s driving this activity, and why is there no sign of it ending?
The GI broking market has been consolidating for a number of years and there is cash readily available to brokers for M&A as well as continuing interest from private equity. Yet growth in GI has been limited primarily because of the lack of three key drivers – strong economic growth leading to business investment in assets that require insuring, hard insurance markets when premiums increase generally due to a lack of capacity, and new insurance products and markets.
All these factors have been generally lacking, with fairly low economic growth continuing and oversupply of capacity keeping premiums soft. One possible exception is growth in cyber insurance, although this is yet to truly take off.
So where do GI brokers look for growth? Employee benefits – particularly the broking orientated areas of health and protection – has proved particularly attractive. In particular the GI market sees that EB provides opportunities for organic growth which is what drives higher valuations of brokers, whether private or listed.
Why do they see relatively more attractive prospects for organic growth in employee benefits? This depends on the broker, but the reasons typically include macro level influences on government policy and demand for EB products and services, for example changing demographics, the increased focus on health and wellbeing, global mobility and rising mass affluence to name a few.
Medical inflation, which is estimated at 9 per cent globally in 2018, is also a factor, driving continually increasing health insurance costs, particularly in countries where there is growing demand.
Buyers are also attracted by the potential for cross sales to existing clients, avoiding the most challenging activity for any intermediary of finding new clients. With risk management a discussion point between clients and GI brokers the link to health and protection should, in theory, be relatively straightforward.
Employee benefit spend by employers can also be pretty resilient in the face of economic difficulties, including health.
So are these acquisitions proving to be successful? The results appear mixed and overall it’s probably too early to tell. The subtle but important cultural differences between EB & GI firms have in some instances been underestimated, as have the challenges of cross-selling to corporate clients. Another common failing has been the inability of some GI parents to protect and nurture the integrity of the EB units that they have invested in, which can lead to a demotivated and disillusioned team.
Continuing high valuation multiples in the UK have also made a number of global brokers and private equity houses pause for thought, as they can invest elsewhere and acquire quality businesses at lower multiples. The UK has historically been seen as a safe place to invest due its relative stability, legal and regulatory systems, but Brexit has introduced a level of uncertainty that some investors do not like.
Yet it remains the case that in the long term the UK EB market will remain a very important one and GI investment represents perhaps the greatest opportunity of any to sustain and build a substantial and successful EB business. Indeed this approach may also enable advisers to reach corporate clients that may never have previously considered an EB programme.
What is clear is that the GI investment in EB seems set to continue. I expect to see more M&As ahead – and indeed GI brokers starting EB businesses – as they seek to boost growth and in turn make themselves more attractive to investors and potential acquirers.
(This article went to print prior to the acquisition of JLT by Marsh & McLennan.)
