FTI Consulting’s O’Brien: Plethora of “attractive assets” driving industry M&A in Europe, but threats on the horizon

After a couple of years of improving market conditions, strong performances among European insurers and distributors have driven a buoyant M&A market across the continent, with the region proving resilient to the global slowdown in M&A activity, according to FTI Consulting’s Rory O’Brien.

However, according to FTI Consulting’s head of EMEA forensic and litigation consulting and co-leader of global insurance services, rising interest rates and a shrinking number of attractive and available assets could see M&A levels go down.

Speaking with The Insurer TV following the publication of FTI Consulting’s biannual ‘European Insurance M&A Barometer Report’, O’Brien, said, “insurance companies and distributors have performed very well in the last couple of years due to the hardening markets and their ability to get proper rates for their insurance policies.

“This has then fed all the way through into the Ebitda of either the insurance companies themselves or to distributors, and has encouraged the PE houses and the other trade buyers to continue to grow and to invest in the businesses – which is why we've seen such activity,” he added.

O’Brien also explained that Europe is being viewed as a “geographical opportunity” due to there being “a lot of interest in the back-ability of management and a huge interest in the quality of management”.

“In the last 10 years, we've seen so many good underwriters come out of insurance companies and go independently either as brokers or MGAs. And again, that's created an environment where there's quite a lot of excitement and a lot of belief that profitability and growth can come from the market,” he added.

O’Brien noted that the “availability of assets has shrunk significantly” in the UK and Bermuda due to the amount of previous activity in the market, leading to an increase in buyers looking to continental Europe for new opportunities.

One area he earmarked for substantial deal activity in the coming years was Germany, with its highly fragmented market appearing ripe for consolidation.

“Germany is poised for significant growth in terms of activity, and we're seeing it already with a couple of really big transactions last year”, he said

Consolidation is still mainly being backed by PE, said O’Brien. Given the “huge advantage” in scale associated with these platforms and the potential to “add on and bolt on” to businesses to drive strong multiples and valuation metrics, O’Brien doesn’t envisage a change in appetite from PE.

This influx of capital has driven up multiples, especially in the case of consolidation opportunities, to levels that in O’Brien’s experience were, “unheard of 10 years ago”.

But in addition to that, the more traditional trade buyers are still “very, very active” in the market, he said.

“Which of those two sectors is interested in doing the acquisition can have a major influence… [on] the valuation of the business and where the business eventually ends up. So, it is quite an interesting dynamic in the market,” he said.

With interest rates beginning to bite and the cost of capital increasing, M&A activity could still ease off in the near future.

MGAs “the darling” of the acquisition market

O’Brien said the rapidly growing number of MGAs led by strong, reputable management is making these entities a very attractive M&A proposition.

“MGAs are the darling of the acquisition market,” he commented. “They certainly are very prominent, in relation to what people are after and there are multiple reasons for that.

“One is the quality of the management. These MGAs have derived from really experienced underwriters coming out into the market, so that's been one thing. Good results have produced a lot of profit commission, and that has bolstered the profitability of these businesses.”

The relatively low capital requirements of MGAs in comparison to balance sheet businesses, makes them particularly attractive to PE companies.

“PE can get in and out of them much easier than they would a regulated capital balance sheet business. So, we're seeing quite a bit of that. The MGAs have been very, very exciting and there have been quite a few of them that have gone for really stunning multiples, in terms of the valuation of them,” he added.

Impact of rising interest rates

O’Brien noted that rising interest rates could threaten the amount of capital coming into the market – firms who bought with a lot of debt may start feeling the pressure of higher interest rates pushing up their repayments.

“Some of them are at a stage where servicing that debt previously, at the interest rates that they were paying, was not that substantial. But now we do see a squeeze coming on those that are more highly leveraged, more highly geared”, said O’Brien.

As well as affecting debt-leveraged firms, O’Brien sees the potential for rising interest rates to make buyers more cautious about what they are getting into.

“But we could have two or three years more of this level of interest… there could well be more discerning positions taken by buyers in the market.”

Watch the 13-minute video with FTI Consulting’s Rory O'Brien in full to hear more on:

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  • The strength of the Iberian M&A market
  • How P&C carriers are being valued at one to two times net book value