Turmoil in credit markets could stall broker consolidation drive say industry figures

Brokers are flocking to insurers for acquisition funding as the credit crunch begins to take its toll on the insurance sector.

Senior insurance figures are predicting that the turmoil in the credit markets that has rocked the banking sector in recent weeks could stall the overheating broker consolidation drive.

One top executive at a major UK insurer said this week: “We are getting brokers, who a month ago were getting funding, now coming to us. The credit crunch is having an impact on their ability to get finance.”

The last year has seen merger and acquisition (M&A) activity in the broker sector reach a furious pace, with consolidating brokers now claiming that most small firms are for sale.

But observers say the acquisition spree could soon begin to stall as cheap and easily available funding from banks begins to dry up.

Allianz Commercial general manager Chris Hanks said: “Brokers who have been acquisitive or who want to be acquisitive probably won’t find capital. Inevitably there has been a lot of M&A activity as credit has been cheap and easy to obtain.

“But that will tighten up with the credit markets.”

The appetite for acquisition and the recent spate of major deals by insurance companies has also seen sale prices rocket. Typical multiples have rise from 1.5 times income to as much as 2.5 times income.

Some of the larger strategic acquisitions of brokers by insurers are thought to have achieved even higher multiples.

Hanks said that the higher cost of debt funding, coupled with the soaring price of brokers and dwindling number of good acquisitions would lead to a slow-down in acquisitions.

“[The M&A market] cannot carry on at that pace. Good brokers who are looking for new acquisitions will find themselves going back to brokers they passed over a year ago,” he said.

Broker Network chief executive Grant Ellis, who this week lambasted the unsustainable prices being paid for brokers (see page 4), said he saw a window of less than 12 months for broker consolidation to continue.

Paul Meehan, co-chief executive of AXA’s broking division, said: “The credit crunch will have an impact on acquisitors, such as Oval and Giles, who leverage their capital from banks.”

Tim Wilson, sales and marketing director at Close Premium Finance, said: “Premium finance providers will be on the receiving end of requests for funding.

“How significant this will be will depend on how long the credit crunch lasts.”