Captive consolidation: How the M&A flurry is impacting the market

Consolidation in the insurance market has been a common play across the globe for a number of years. In recent times, the flurry of M&A activity has continued and is directly impacting the captive insurance space, with large players that are seeking an end-to-end solution for their captive clients picking out independent specialists to complement their offering.

As the activity continues, different company cultures meet, clients shift and reputable professionals vie for the top job in their respective departments.

While the largest players boost their ranks and balance sheets, leaders looking to make their mark in a smaller operation depart in the hope of innovating from the outside.

The past year saw two large scale deals shake the captive insurance industry. Global insurance giant Marsh & McLennan acquired Jardine Lloyd Thompson Group (JLT), with 99.9% of JLT shareholders voting in favour of the $5.6bn takeover. Alongside bringing together two of the largest broking and risk management firms, the acquisition also increased the size of Marsh’s captive management book.

A few months before, AXA agreed a $15.3bn takeover of XL group, which is expected to create the largest global property and casualty commercial lines insurer.

“It’s an interesting situation”, notes Sean Welsch, who himself left Zurich last year to start his own captive practice in Asia. “How will they [AXA, XL, JLT, Marsh] take things forward? It’s going to be interesting to see how these deals will impact the market going forward”.

While the mammoth deals of the past 12 months have grabbed headlines, smaller, independent captive managers have also been getting in on the act.

Capstone Associated Services, a mid-market, independent manager made no secret of its desire to expand its footprint. In a statement released in November last year, CEO Stewart Feldman claimed that “many captive managers lack the required expertise” for effective captive planning, and announced a programme to acquire US captive management portfolios.

Other managers have also picked up this strategy. “We want to merge with talented groups of people who have a deep understanding of their business, strong personal client relationships and a clear vision of how their value propositions needs to evolve so they remain relevant in the future”, David McManus, CEO of Artex Risk Solutions tells Captive Review.

Size does matter
A driver of the increasingly common strategy predictably comes from the want of a larger footprint across respective markets.

“Any M&A activity will need to accommodate a clients developing needs”, says Paul Owens, CEO of Willis Towers Watson’s global captive practice. “We find clients are very loyal to their manager and build long-term relationships. Consolidation will create a critical mass to be able to deliver new services whilst maintaining profitability through spreading costs”.

While there is an industry consensus that captive insurance clients are loyal, the smallest managers can find it hard to grow because of the need to “heavily” invest, while the largest players can often find it hard to innovate, according to McManus.

“A predictable cycle exists throughout the insurance and financial services industry”, he says. “Small businesses get to a point where they need to invest more heavily in people, service platforms, succession planning… a desire to monetise personal equity makes for a combination with a like-minded group of people the right choice for all the businesses’ stakeholders.

“At the same time, larger, less entrepreneurial managers take their eye off the ball and lose both existing and prospective clients to more focused independents. This is a healthy cycle, which drives innovation and raises service standards within the overall market”.

Despite the possibility of being swallowed up by increasingly aggressive M&A strategies, managers continue to spin out in the hope of leaving their mark on the industry.

Welsch, who set up Welsch Captive Management in November 2018, claims that in order to move the industry forward, an independent view is required.

“When you look at development and relation in insurance, the larger companies aren’t doing anything particularly new, let’s be honest. The big thing everyone talks about is blockchain, but that’s essentially a tool. It’s not a solution, it’s what you do with it”, he explains.

“It comes down to creating innovation, utilising data, focusing on the customer space and driving forward that solution rather than just concentrating on what people consider to be profitable models.

“For the large part, insurance has been commoditised. In the commercial and corporate space, that’s interesting because it stops innovation.”

Regulatory troubles
While some believe innovation is best driven from an independent, regulatory pressures in the age of Solvency II, Beps and the IRS’ captive insurance clampdown could be the downfall for managers at the smallest end of the scale.

“Some independents will be looking at getting acquired because they just cannot provide what many of their clients now need”, predicts Owens. “The smaller guys can’t deliver actuarial functions, compliance, all the stuff that captives really need nowadays.

“Given where we are now, with Beps, substance and increasing regulatory requirements, one man bands will simply not be able to satisfy the requirements, and captive owners are recognising this”.

Increasing regulatory requirements and uncertainty was not a pressure for Strategic Risk Solutions (SRS) when it was entering the European market, and it actually posed an opportunity. Stuart King, managing director for SRS Europe explains: “Solvency II created so much uncertainty, it was the right time to set up in Europe. We are experiencing a big growth area in the Solvency II and governance areas. That’s really where we’ll grow”.

Mid-market growth
As industry giants tie up and finalise their deals, mid-market managers like Artex and SRS could find themselves with an opportunity to grow through a new surge of clients as well as acquisition opportunities.

“You will see independents getting bigger”, says Owens. “SRS are branching out, the recent acquisition of Ark Insurance Management PCC in Malta for example. Their success is driven by their independence and flexible entrepreneurial culture”.

Artex, which is owned by Arthur J Gallagher, will continue looking to buy business, reveals McManus. “We have a very healthy prospect list, many of which have been in a dialogue with us for a number of years. We currently have one in due diligence and have term sheets under discussion with a number of others”.

Real growth?
Although the past 12 months saw a whirlwind of deals and mergers, King does not believe that the European market will continue to bring acquisition opportunities. “There’s not actually too many players. We’ve analysed a lot of them, through acquisition or organically. I don’t see a huge acquisition in Europe. We don’t have too many acquisition targets in Europe, our desire is just to be a boutique player with independent programme design with high quality delivery on the management side.”

As mergers and acquisitions continue into the year ahead, Welsch claims that a lack of forward movement in the insurance industry could push businesses towards independent managers who can work directly to their needs. “People want something new. Where’s the future? This is part of what needs to happen, and the captive space is where things will go.

“Big companies are not always the best choice. As an independent, you can help companies understand things more because they feel you’re closer to them. Your interest is more aligned than a large insurer”, he concludes.

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