A record number of M&A transactions in the distribution end of the market, with tech-driven service providers and equity brokers at the forefront of the transaction boom, is predicted for 2017 in investment management firm, Conning’s, annual global insurance M&A study.
Insurance brokers and private equity sponsors have been leading the M&A trend; the study revealed activity was concentrated among public and private equity-owned brokers, whose transactions made up one-third of all insurance distribution transactions from 2012-2016.
“We identified 368 distribution related transactions in the U.S.,” said Steve Webersen, Head of Insurance Research at Conning.
“The greatest appetites reside with the insurance brokers and their private equity sponsors. As the consolidation has continued over the years, valuations have risen accordingly.
“However, while demand will likely remain high going forward, the market will have difficulty sustaining these high multiples in the face of rising interest rates,” he said.
Insurtech M&A escalation is an emerging trend witnessed in 2016, which saw a record number of tech-driven service providers being acquired, that’s expected to continue throughout 2017 and beyond.
Conning analysts commented; “the industry cannot afford to ignore new risks and new technologies. Insurers are obliged to invest in resources to enhance growth and efficiency.”
But Conning warned not all insurtech start-up M&As would play out as hoped; “Although there are numerous InsurTech startups, not all will be successful, and we expect consolidation among InsurTech firms to escalate, with insurers and distributors as natural buyers.”
The study revealed U.S. insurance distribution transaction volumes were above the five-year average last year, despite slowing down somewhat from the year before.
And market conditions are ripe for continued high-levels of M&A transactions, with growth being the most important driving factor: during periods where organic growth is scarce, M&As emerge as the most viable expansion option.
Valuations have risen as a result of this increased demand, but this isn’t likely to slow down M&A growth, analysts said.
Alan Dobbins, a Director, Insurance Research at Conning, commented; “Consolidation of insurance distributors continued at a rapid pace through 2016 and into 2017.
“A strong economy has done its part to create a rising tide of increasing exposures and continued attractive financing costs. It seems that M&A has replaced organic growth for many in the insurance distribution sector.”
“Likewise, at the moment, outsiders are highly focused on enhancing and disrupting the insurance value chain. Both of these forces will drive additional startup and acquisition activity. The combination of a higher level of confidence among businesses and expectations for lower tax rates could serve to accelerate the pace of M&A in the distribution and services sectors.
During 2011-2015, the insurance distribution sector averaged 348 transactions per year, Conning said this demonstrates; “that sellers remain motivated and demand for insurance distribution acquisitions remains robust.”