Insurance broker deals – a new way to release value in M&A
December 16, 2014
Deals activity in the insurance industry is up: you might have seen our recent video where Albertha Charles, insurance valuations partner, discussed this spike in recent merger and acquisition (M&A) activity in the insurance market and the drivers behind this.
Mirroring this trend, the UK insurance brokering sector is also experiencing increasing appetite for growth through M&A. Earlier this year, a survey of 400 UK brokers showed that over half (58%) would either be completing a merger with another insurance intermediary this year or would be considering one (Insurance Day, 12 May 2014).
There are various drivers drawing buyers into such M&A activity, such as seeking economies of scale, market reach and reducing costs, all with the aim to maximise profits. The first thing you need to bear in mind when embarking on a deal is “how can we maximise value going forward?” Equally though, a seller should consider how to maximise value for its shareholders as part of its preparation for sale.
Ongoing obligations
When preparing for sale, an area that has always been difficult to address is legacy servicing obligations for past business. Ongoing servicing of legacy clients often has little value to the purchaser. In addition, there may be significant legacy trapped cash in client money accounts. As a result, legacy can directly impact value.
Swift closure
But now there is an innovative solution to address the issue. Earlier this year, we worked on the first Scheme of Arrangement (“Scheme”) for an insurance broker to deal with its legacy brokering business. The Scheme was sanctioned in June 2014 and the value was realised within three months. This terminated all long-tail servicing liabilities of the broker, enabling swift closure and reducing years of future management and regulatory costs.
Redirecting cash
In this way, a Scheme can be used to terminate or transfer legacy servicing obligations, increasing the businesses’ value. By freeing up servicing costs, a scheme can also improve overall profitability and levels of EBITDA, enabling cash to be directed elsewhere – which might be particularly interesting to investors in a market that is otherwise showing slow signs of growth and modest returns.
In the case above, this also enabled the company to release unallocated client monies, freeing up capital and increasing value of the business.
Improving shareholder value
Schemes of arrangement can provide brokers with the option to capture or enhance the businesses or books of business value prior to completing a sale. With M&A activity expected to further increase, and in today’s environment, where increasing shareholder value is key, management should consider how to enhance shareholder value before, or as part of, any sales process.
What experience do you have in taking on legacy servicing? How much did it cost you? What could you have saved had you been able to use a scheme or arrangement? Share your thoughts below or schedule a meeting to discuss your situation in confidence.
