‘Are the national champions also capable of winning the game on European soil’
In the years ahead, further scale-up and internationalisation combined with a strong focus on operational excellence will become even more important for Dutch intermediaries. That’s why BHB Dullemond has entered into a strategic alliance with FTI Consulting, a global management consultancy with European headquarters in London.
The partnership with FTI Consulting offers the opportunity to provide BHB Dullemond's clients with access to international insurance platforms and private equity players in Europe and the US. We interviewed André Frazão, Associate Partner and Head of Insurance M&A in EMEA at FTI Consulting, about what challenges lie ahead for today's broker consolidators in the European insurance market.
A world to be won
Frazão: ‘The UK and the US were the first markets where insurance brokers launched a proactive roll-up strategy. On the European continent, it was the Netherlands. Meanwhile, a number of successful consolidators have emerged in the Netherlands and are about to broaden their reach within Europe. Apart from the Belgian market, Dutch consolidators have yet to build an international track record. Large intermediaries need to ask themselves how they are going to successfully roll out their international strategy to achieve a podium place abroad. Each country has different market dynamics, business culture, and language barriers and a careful and considered approach is therefore needed. International broker platforms, such as Howden, PIB or Acrisure, have successfully entered some continental European markets and have now a long track record of consolidation in these regions. However, some markets might present more challenges to enter, such as France, which is dominated by large management-owned broker businesses, where international players have been struggling to penetrate. At FTI, we assist both European and US broker consolidators making their international journey a reality. We provide insights into the different markets, the best practices and we help to roll out international acquisition plans.’
Turning point on the Spanish market
Frazão continues: ‘The Spanish economy has now recovered from the banking crisis and the COVID-19 lockdowns after some challenging years. This turning point is also clearly evident on the Spanish insurance distribution market. Similar to the German and Italian markets, tied agents working for one insurer predominate in Spain. In addition, the Spanish insurance market had several independent broker “platforms” along with a significant number of small brokers. Foreign parties such as Howden, PIB Group, Acrisure, BMS Group, Söderberg & Partners and a number of both local and international private equity players entered the Spanish market en masse last year. Not wanting to fall behind, these international platform companies have bought a significant share of the largest Spanish intermediaries in the last 24 months and are looking for a consolidation play in the years ahead, suggesting that competition for targets will be fierce. Economic and market dynamics have led to insurance transaction volumes increasing by as much as 300% in 2022.’
‘For international players, an untold potential beckons with your neighbours across the border to the east. Germany is one of the largest insurance markets in Europe and is highly fragmented, with over 20,000 independent intermediaries. However, it remains conservative. The regulatory framework in Germany is less strict than in the Netherlands, but the decentralised autonomy in the various federal states could make it more complex. This is particularly challenging for German insurers – and to a lesser extent for German intermediaries – which is also why the consolidation drive among German insurers has not taken off yet. About five years ago, it was challenging for a foreign investor to buy an insurance broker business in Germany, but there are now more than six private equity-backed platforms in Germany, which some of them are buying an average of ten companies each year, suggesting that we might be at an inflexion point. This has substantially increased the market dynamics, so now even smaller brokers are open to sell their businesses. When you get a high-quality management team and the right acquisition strategy, things can happen very quickly on the German insurance market. When it comes to the acquisitions, broker platforms operating on the German market have a well-stocked pipeline, and a runway for a decade. However, valuations for broker businesses have been rising, and despite the pool of thousands of brokers, the businesses have been trading at multiples similar to more mature markets, such as the UK and the Netherlands’ according to Frazão.
Local feet on the ground
Frazão: ‘In Germany, but also in many other European countries, a local approach is a must. You have to adapt to the language, culture and regulatory framework of each market. International players developed local platforms on the Iberian Peninsula, in the DACH region, the Benelux, in Italy and in the Nordics, with local management teams, with strong local knowledge and expertise. In addition, large international players set up business divisions for Europe, as for instance, the Ardonagh Group created Ardonagh Europe, or Howden and the PIB Group have appointed dedicated European leadership teams. The M&A teams within these companies also focus on specific regions, giving them a much better understanding on how a market works and the targeted businesses. If you want to successfully roll out your international strategy, you need to have knowledge of a specific market, find a high-quality local management team and the ability to build a best-in-class operating platform and governance model. Take Germany, for instance, where many players would be eager to enter the market. Several private equity firms are doing their best to acquire a German broker platform, but lack German capabilities. Without local capabilities and relationships and the understanding of the culture, these markets might be challenging for international investors. Local feet on the ground are essential, after all continental European SMEs are used to do business in their local language.’
Carefully stringing pearls
‘We also help our clients to build a solid operating platform in which the acquired businesses are optimally integrated. Combining the businesses and their different cultures, infrastructure and customer base is a complex job. The platform must be more than the sum of its parts. There are synergies and efficiencies to be unlocked in several areas, but across markets we see that there are limited benefits to be gained from an operational perspective. The greatest efficiencies are achieved by optimising the insurance panel and the ability to cover clients across multiples geographies. Furthermore, other forms of efficiencies could be to nearshore a part of the back office. Regarding IT systems, I haven’t seen yet a sole company that has managed to integrate all processes into a single IT system across multiple jurisdictions. The largest international players on the European insurance market have been buying an average of twenty to thirty companies a year and have their hands full with the integration process, which is by no means completed. Due to the rise of interest rates and cost of debt. The focus at the moment is on the operational side, with cost optimisation to better manage the cash flows and increasing the organic growth. Insurance brokers have implemented very limited advanced technology to date, and management will only consider investments in technology to optimise their value chain when these businesses start to mature and reduce the pace of M&A,’ Frazão explains.