M&A in 2021: Aon-Willis, Chubb-Hartford, Lemonade-Metromile and the rest
Broking M&A in 2021 was defined by the deal that didn’t happen with last year’s $30bn Aon-Willis merger hitting the rocks amid antitrust objections, even as the retail broking space hit a new peak of transactions at the smaller end.
That surge of “roll-up” deals came without the biggest private broking platforms being brought to market, with existing private equity backers instead choosing to pass them from one fund to the next.
The first evidence that we may see the roll-up of roll-ups as the next set of major transactions emerged, and speculation picked up that Ryan Specialty Group’s IPO may break the seal on a long-expected wave of broker debuts.
Beyond brokers, commercial lines M&A was down in volume terms, although the deal value rose year-on-year from a low base on higher transaction sizes, Inside P&C notes in its end of year M&A review. Depressed deal-making reflected the growth opportunities resulting from the hardening market, rising valuations and fears around reserve adequacy in old casualty years.
Elsewhere, the year was also defined by a deal that didn’t happen, with Chubb’s tilt at The Hartford illustrating the challenges of getting commercial lines carrier transactions done at this point in the cycle.
In InsurTech, the bigger names started to emerge as acquirers, capitalizing on their ability to raise capital or issue paper at high valuations. Lemonade took out Metromile, as the latter suffered in the InsurTech SPAC rout, while cyber player Coalition diversified through a deal for Attune.
The auto space also showed activity with traditional players Liberty Mutual, Allstate and Progressive to deliver growth that outstripped that of InsurTech start-ups building organically.
After almost 17 months of working to close the most ambitious M&A deal in the history of the sector, Aon and Willis went their separate ways rather than offering additional remedies or fighting the DoJ’s antitrust suit in court.
The deal would have been transformative for the companies, and made a major impact on the broader competitive landscape – and even as an aborted event it made the weather in the broking space.
One of the implications of the terminated deal is that regulatory issues have removed mega-deals from the table in broking, with the Biden administration’s robust antitrust stance creating significant risk.
Almost no one among the sources surveyed by Inside P&C expects another large acquisition to take place in the coming years, at least until the end of the Biden administration. Deals between Marsh McLennan, Aon and Willis Towers Watson – in any combination – are clearly off the table.
But also, transactions involving the big three and AJ Gallagher, the fourth player with roughly two thirds the size of Willis, seem unlikely, sources said.
Nevertheless, 2021 was another big year for broking M&A deals.
According to investment bank MarshBerry, 2021 is projected to close with 849 deals, or a 20% increase after 2020 registered 711 broking transactions, a significant jump since 2015 closed with 456 acquisitions.
Inorganic growth “has been going up exponentially throughout that period of time,” MarshBerry chairman and CEO John Wepler told Inside P&C.
A number of factors have driven that trend. Excluding a few outliers, the average share price for publicly traded brokerage firms have gone up over 64% from December 2019 through December 2021, while in that period the Dow Jones index has climbed 24%.
“The equities market is signaling that this is a very good industry because the per share value has gone up what amounts to be more than twice what the Dow Jones Industrial Average has,” Wepler said.
Another factor is the availability of debt. Around $21.6bn of debt has been raised since Q4 of 2020, with around $19bn raised by the high leverage firms, which typically operate at debt-to-Ebitda ratios of between 5x and 10x.
“So, the bond market, the institutional debt market, is signaling that they feel there's a very low risk of default and they're very confident in the business,” Wepler added.
Valuations have risen over the last decade and remain high due to low and prolonged interest rates, favorable guidance by rating agencies including Moody’s and S&P, a hardening market in the P&C sector, and reduced taxes during the Trump administration.
The perpetual cycle of broking consolidation
The downfall of what would have been the largest deal in the industry's history led to other consequences in the insurance sector.
The largest from an M&A perspective was the acquisition of Willis Re by AJ Gallagher for $3.25bn, marking the Illinois-headquartered broker’s largest deal so far – and catapulting it to an unassailable third place in the highly consolidated reinsurance broking market.
The Pat Gallagher-led brokerage is one example of broking firms expanding inorganically across the US, the UK and other markets, with frequent acquisitions of smaller companies.
Some other brokers following that path during 2021 were Hub International, Brown & Brown, Acrisure and Risk Strategies.
“I think we are almost in a perpetual cycle,” one executive told Inside P&C.
“Even though there's been an enormous amount of consolidation in the distribution world, it kind of continually rejuvenates itself and groups over time get acquired then fracture.”
What 2021 has lacked is a full change of control deal for one of the major PE-backed broking platforms via an auction, with the trend in 2020-21 for the biggest platforms like Hub, Alliant and NFP to refinance via secondary deals with their existing capital partners choosing to “play the long game”.
“There is significant demand to deploy capital in the retail brokerage space, both in the US and UK markets, and that has obviously driven up valuations,” said Chris Ackerman, managing partner at Flexpoint Ford.
He went on to say that “there are a lot of private equity firms that historically have not invested in the financial services sector that are now trying to deploy meaningful capital into retail brokerage.”
“I don't see any end in sight for the demand to deploy capital into retail brokerage, there's just a scarce number of available assets of scale,” the executive added.
A second consequence of the failed mega-merger was a disruption in the talent marketplace, where there is currently a shortage.
Some producers have left for challenger brokers, while smaller players with a more entrepreneurial culture, including fronting companies and MGAs have attracted talent in the industry.
Risk Strategies CEO John Mina told Inside P&C that “the talent issues facing our industry are not dissimilar to the macro issues facing business in general.”
Mega deals have “created a lot of disruption for employees and clients and created an environment where people pause, take stock of the situation and potentially make different decisions,” he said.
Risk Strategies inorganic growth plans have focused on “specialty firms that fit with our long-term plan and sometimes that means waiting for sellers to be ready,” he said.
Commercial lines – another deal that wasn’t
Another mega-deal that did not come to pass was Chubb-Hartford. Chubb made three bids to acquire The Hartford last spring, but all were rejected, and the aggressor withdrew.
The $23.2bn deal attracted the attention of the industry due to its size, but also because M&A activity among commercial lines carriers has decreased over recent years, and Chubb chose a challenging moment to move and a difficult target.
S&P Global data shows that the number of deals in the P&C space decreased to 35 in 2021 from 57 in 2020. But the total deal value of the transactions increased to $30bn from around $10bn in the same period, reflecting large deal sizes.
Some sources said that a key reason for the smaller number of transactions is the current hardening market and stronger pricing across almost all lines in the last couple of years, which have made carriers turn their attention to organic growth.
However, sources told Inside P&C that even though inorganic growth has been “less of a necessity” in recent years, the insurance industry will experience a soft market in the midterm, with some sources pointing at the second half of 2022 or early 2023, which could lead to higher M&A activity among commercial lines carriers.
This will also depend on, some said, the overall recovery as the US economy struggles to move on from the pandemic-induced recession. The macro backdrop for deal-making will also reflect the behavior of the Federal Reserve as it looks to cool inflation without undermining market confidence.
Still, even though 2021 was a tough year for commercial carrier M&A deals, some transactions took place.
In late October, Exor agreed to sell its pure-play reinsurer PartnerRe to French mutual insurer Covea for $9bn, reviving a deal that collapsed at the height of the pandemic.
Covea first agreed to buy PartnerRe in March of 2020, which would have meant Covea paying $9bn cash for the Bermudian reinsurer.
However, the takeover deal was scrapped last May after the French mutual attempted to renegotiate terms due to the impact of Covid-19 and was rejected by the Agnelli family investment firm.
At the end, the transaction valued PartnerRe at 1.25x H1 shareholder equity, the same multiple to trailing book value which was agreed for last year’s deal.
“For the reinsurance market, at some point, I think we'll see less players in that space, and more capital moving to insurance, ILS and other capital markets-related forms of reinsurance,” said Ackerman from Flexpoint Ford.
InsurTechs emerge as acquirers
If M&A activity slowed down among commercial lines carriers, InsurTech proved to be one of the most dynamic parts of the industry.
The largest deal in this space was Lemonade’s acquisition of pay-per-mile auto InsurTech Metromile in a $500mn all-stock transaction, or $200mn net of cash.
The deal could enable homeowners’ InsurTech Lemonade to mitigate some risks in trying to penetrate the highly competitive personal auto market.
The transaction was the InsurTech hot spot of the year, but there were others.
In October, cyber underwriter Coalition bought MGA Attune, which was owned by AIG, Hamilton and the hedge fund Two Sigma.
Some executives expect that transactions at the intersection of technology and brokerages will increase in the coming years, as brokers put their business process workflow into technology platforms.
“The brokers are using technology...we think that is really going to gain a significant momentum and longer term be really what drives InsurTech movement,” Wepler from MarshBerry said.
“The whole industry is going from risk management to risk mitigation...And we think the brokers are really at the heart of that,” he added.
Another notable transaction was USAA’s move for usage-based insurance writer Noblr, with around $100mn paid for a business with almost no premiums – pointing to the scope for incumbents with major cash-flow to use M&A to outsource R&D on technology.
Auto deals inked
Lemonade’s acquisition of Metromile may have been the largest 2021 deal for the InsurTech market but it wasn’t in the auto space.
In the summer, Liberty Mutual struck a deal to buy State Auto Group, adding $2.3bn of extra premium and a network of 3,400 independent agencies (IAs).
The Boston-based giant mutual paid $52 per share, or $943mn, for the 41.2% of the Ohio based regional carrier that is traded on the public markets.
The acquisition made sense with Liberty looking to maintain its distribution and underwriting advantage in the personal auto market, but also because the giant mutual has a solid track record in making acquisitions to bolster its regional presence in the independent agent channel.
Another deal, though a smaller one, was Progressive’s acquisition of Indiana-based Protective Insurance Corporation for $338mn in early 2021.
First revealed by this publication, the transaction aimed to accelerate Progressive's growth in commercial auto, where it is already the biggest writer with $5.6bn of premiums in 2019, by strengthening its position in long-haul trucking.
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