Howden: Sky-high broker valuations creating “unsustainable” expectations

Howden Group founder and CEO David Howden has said the private equity buying spree for UK (re)insurance intermediaries is driving valuations to record levels but warned that generous price premiums are raising expectations that may be “unsustainable” in the long term.  

Speaking exclusively to The Insurer TV, Howden noted that the sector’s track record of renewable revenue and strong cash flows – particularly in the broking and MGA segments – is attractive to private equity firms hungry for investment opportunities.

This is seeing “huge” levels of private equity money being channelled into the market and is “clearly driving values”, he said.

“To some extent what private equity is doing is driving up valuations. In some ways, not least because of cheap debt, this is creating potentially unrealistic expectations for people,” he continued.

But the executive dismissed the importance of valuation multiples in determining M&A targets. Instead, Howden said the value of a deal lies in the combined entity’s ability to generate long-term growth and the desire for staff working in those businesses to make the deal happen.

“As the insurance market becomes more attractive to investors, and therefore multiples increase, ultimately, what multiple you pay is not really the critical point,” Howden explained.

“What’s really critical is whether that business is going to create value over the long term, does it want to strategically be part of you, do the people working in that business want to do it, because that’s the only way … that you’re going to create a business that delivers value in the long term.” 

He warned that a mass exodus of staff and disenfranchised management can be more destructive and said a focus on double-digit organic growth and attracting the best talent is necessary to generate long-term value.

“Yes, prices are high, but for the right businesses over the long term, it’s all about the cultural synergy and the fit. It’s not about an arbitrary multiple,” he added.

While the (re)insurance market undoubtedly represents an attractive target for private equity, Howden raised concerns about the potential for a disconnect in the values between some investors and the client-centric philosophy of the broker market.

“I see them [private equity] as absolutely seeing us as an attractive business to invest in. The trouble with that is I’m not sure they really give a monkey’s about insurance,” he explained. 

“I really do care and everyone who works in this group loves insurance, and they really care about their clients and they want to do the best for them. In doing that, we’re going to build phenomenal value, but it does worry me that there are people coming in with a spreadsheet.” 

The Howden Group philosophy goes against this grain, he said. The intermediary’s management and an estimated 2,000 (pro forma for Aston Lark) of its employees remain the largest shareholder group, while long-standing backer General Atlantic and Canadian pension fund Caisse de dépôt et placement du Québec also hold stakes. 

Howden’s entry into the UK SME commercial and personal lines market with its £700mn ($934mn) acquisition of A-Plan also led to the arrival of new shareholder Hg Capital.

“These are people who really understand supporting management teams, taking minority stakes, not controlling the business and looking to build long-term value by not leveraging the business,” Howden added. 

Aston Lark a platform for international growth

The executive’s comments come after Howden Group paid around £1.1bn for UK retailer Aston Lark. Howden said the acquisition – its largest to date – made a statement that would solidify its position in the UK market.

He said the deal – which was financed through a combination of equity and debt – creates a group with a combined enterprise value in excess of $10bn and makes the firm “the premier broker in the UK”.

Aston Lark has made circa 40 acquisitions to date under CEO Peter Blanc and a record 21 this year with the backing of Goldman Sachs’ private equity arm and Bowmark Capital. However, Howden dismissed ideas that his firm would adopt a similar aggregator model.

“We’re industrialists. We’re here to build a business over the long term, absolutely that means doing M&A and teaming up with businesses that want to be part of us,” he added.

He explained that while Howden has a “huge” specialty business in London and a growing personal lines and SME presence thanks to its recent swoop for A-Plan, the Aston Lark deal provides the intermediary with a more heavyweight UK base from which it can look towards international expansion.

“One of the critical things about the Aston Lark deal is that it really makes us an absolute force in our home market. But it’s really relevant for us internationally as well,” he said, adding that the deal will serve as proof of Howden’s ambitions as a “credible challenger broker” outside the UK.

“We can say to the colleagues that we want to team up with, to the individuals we want to attract, the clients we want to attract, the insurers we want to deal with that we are incredibly strong in our home market and we have absolutely the ambition and the resolve and the firepower to be incredibly strong in your market as well.”