Private equity plays a significant role in current M&A landscape: Howden’s Madea

In a recent interview with Reinsurance News, Jarad Madea, CEO, Howden Capital Markets & Advisory, discussed what the underlying drivers of the hard market conditions are, and how they are currently impacting the insurance sector, as well as how organisations have responded to them.

Madea stated that the hard market conditions are driven by a number of different factors, including property volatility and climate change, high interest rates, constrained capital, and inflation and its impact on reserving.

“These factors have widened the bid-offer gap on transactions between buyers and sellers, affecting valuations of reserves, sustainability of current market conditions, growth prospects, and mark-to-market on investment portfolios,” he said.

“In response, some companies have taken the opportunity to exit underperforming or non-core assets, allowing them to streamline operations and focus on their core segments.”

Focusing attention on carrier M&A activity, Madea noted that activity has been minimal throughout the last few years due to a range of factors.

“First, harder market conditions and increased cost of capital have driven a focus on organic growth for who would otherwise be potential buyers, reducing the need for strategic acquisitions,” he said.

“Second, and similarly, would-be sellers have leveraged market conditions to grow independently. Third, public market valuations have risen significantly. As such, would-be sellers aren’t selling without receiving an attractive premium to book value that buyers are not willing to pay while simultaneously taking on integration risk and incremental operational and reserve risk.

“As a result, we have seen a market where companies have opted to grow organically, lowering both the cost and risk of said growth.”

However, despite the slower environment, deals are still being made and being completed across the industry, but Madea explains that this is generally among niche spaces such as cyber, as well as divestitures of geographic divisions, and underperforming or non-core business lines being sold.

“So, while we’re not seeing broad or large-scale M&A, we are seeing – and advising companies –on deals to acquire specialized knowledge or capabilities that enhance their competitive edge. This trend is likely to continue regardless of broader market conditions,” he continued.

Furthermore, Madea was then asked what catalysts could potentially reignite M&A.

He said: “We are seeing signs now of rates flattening and even retracting in certain areas. Reinsurance rates, particularly on the property side, began to come down slightly mid-year 2024 and some primary lines of business rates are also flattening or coming down. As we see this continue, large carriers – who experienced strong organic growth over the last few years – will be in strong balance sheet positions with excess capital and will look at M&A to continue that growth and potentially consolidate some expense out of the industry.”

Focusing attention on private equity now, Madea explained how it plays a significant role in the current M&A landscape.

“There is substantial private equity capital in the space, and many private equity-backed businesses are approaching the typical four to seven year holding period, and these P/E firms will start to look at exit options. This is particularly true for the “class of 2020” startups. Coming into 2025, that private equity class will be looking for exits over the next 12 to 24 months.”

Adding: “As they do, we can expect increased capital markets activity across U.S. specialty companies as well as Lloyd’s companies that have private equity capital. The question is whether this will come from M&A and selling or taking companies public. While the IPO market remains a question mark, we have seen some successful IPOs, such as Bowhead – which was very well received and traded up – and could pave the way for more IPOs looking forward.”

Madea concludes by explaining what he is most excited about for the market throughout the next 6 to 12 months.

“Giving my expectation for increased M&A activity in the carrier space, I am excited for the opportunity for our team to provide high quality and differentiated strategic M&A advice to our clients over this period to help them in achieving their goals whether it be buying and building or selling.”

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