Despite recent high profile acquisitions, there is no buying frenzy, says Michael Faulkner
High profile acquisitions with high price-tags have dominated M&A activity in recent months. AXA's acquisition of direct insurer Swiftcover is rumoured to have cost the French insurer a cool £150m - not a bad price for a company that has yet to make a profit.
Meanwhile motorcycle broker Carole Nash is thought to have been picked up by Groupama for over £80m. And last June, high net worth specialist Home & Legacy is rumoured to have cost Allianz Cornhill nearly £60m - more than twice the value some had attributed to it.
If these figure are correct it would be easy to think that the insurance sector was in the midst of a buying frenzy with price-tags rocketing across the board.
The reality, however, is somewhat different. The prices associated with the high-profile acquisitions are the exception rather than the rule.
Stuart Reid, chief executive of broker Stuart Alexander, which was bought by AXA last month, says the sale price of brokers has not soared.
"For small-to-medium sized businesses, I have not seen the price change for the past six months," he says.
"Private lines brokers tend to attract lower prices than commercial or niche businesses - it all depends on the type of business."
Reid, like other acquisitors, will not specify the current multiples of commission that are being paid for fear that specific figures will become benchmarks for future deals.
It is thought, however, that at present multiples are in the range of 1.25 to 2 times commission.
This view is echoed by the insurance market 'über' consolidator Towergate. A spokesman points out that although specialist mono-line businesses tend to be higher priced, "an over-priced feeding frenzy" is not expected.
Carole Nash and Home & Legacy are specialist businesses with niche sectors and it is these types of businesses where acquisition prices can be high.
Additionally, both companies were seen as strategic to their purchasers and there was a lot of interest from other parties which could have pushed prices upwards.
Reid adds that despite the likes of Towergate continuing to prowl the insurance market looking for acquisitions, the overall demand for brokers has not rocketed. "There is demand, but it's not that much higher," he says.
Whether this changes will depend on the "level of activity and whether other consolidators come in", he says.
A recent report by analyst Datamonitor predicted that the broker consolidators' hold of the general insurance market would increase from £3.4bn in gross written premiums to £7.6bn by 2010 if their growth targets were met.
In the next three years, a considerable level of merger and acquisition activity is expected, which will ensure demand and prices remain buoyant.
AXA's emergence as a consolidator could serve to increase the overall demand for brokers and may lead to price inflation, particularly if other insurers take the decision to follow its lead. IT