Given some of the eye-watering multiples that have characterised recent carrier M&A deals, it seems like a good time to query whether some of these acquisitions are worth the price paid – both in terms of the accretive value to the acquirer and whether, crucially, the resulting combined entity will prove to be a good fit.
In this issue of IQ, US managing editor of The Insurance Insider, Anthony Baldo, assesses what lies behind what he describes as the “frothy” multiples generated by some of these M&A deals.
A point raised by one of his interviewees – Miles Wuller, COO of Ryan Specialty Group Underwriting Management – caught my eye. Making the case for expanding the company’s portfolio of MGUs, Wuller says: “We’re paying fair prices [for acquisitions], but really seek to win on cultural fit.”
The point about cultural fit is an apposite one for underwriters. One oft-heard criticism of XL Group’s merger with Catlin in 2015 was that the absorption of a classic entrepreneurial London market business by a highly corporate global carrier was unlikely to be a happy marriage.
The jury might still be out on the success of that relationship, but there will have been more eyebrow-raising when the merged entity subsequently came under the hammer - eventually selling to French-headquartered multi-national carrier Axa in March this year. As one London market broker told me recently. “Allianz I could understand, but Axa?”
In an interview with the Financial Times, Thomas Buberl, CEO of the acquiring company, said he had anticipated the market’s negative reaction, adding that it would probably take 12 to 18 months to convince investors the XL purchase was the right decision.
But in an era when companies increasingly view the barriers to entry via traditional Lloyd’s or company market startups as prohibitively high, and face a shrinking pool of acquisition targets, the prospect of aligning themselves with an MGA/MGU instead might seem ever more attractive. In our MGA Review supplement on page 29, proponents of the MGA model argue that they are all about adding small-scale underwriting diversity, characterised by low set-up costs, flexibility, agility and speed to market – all via a vehicle that is eminently scalable.
MGAs face none of the headaches experienced by purchasers of unwieldy (re)insurance groups or companies, with their troublesome legacy systems, cultural differences and expensive headcount.
Indeed, the burgeoning MGA sector could see even more traffic as carriers seek to put their capacity behind a more cost-effective solution to acquiring that necessary diversification.
But let’s not get ahead of ourselves. Before we position MGAs as the saviours of an increasingly ponderous, ever-consolidating (re)insurance market, let’s note The Insurance Insider’s analysis of Willis Re’s mid-year renewals report.
London market MGAs in particular are likely to come under greater scrutiny in the near future, given that the sector’s expansion “owes much to a period where top-line growth has been favoured over pure underwriting profitability”, The Insurance Insider recently wrote.
Doubtless, all MGAs/MGUs will tell you that underwriting profitability is absolutely their focus. However, the truth of those assertions, and the putative cost-effectiveness of the MGA model, is inevitably going to be put to the test. All of which, according to The Insurance Insider, could see this period of growth come to an end, “and a likelihood of some failures or distressed sales”.
Possibly at less frothy multiples than (re)insurance companies…
To read the Summer 2018 issue of IQ, please click here.