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Opinion: Is the CFC mega-multiple justified?


Late on Wednesday, we broke the news that CFC had inked a deal with EQT and Vitruvian in a deal which values the business at a stratospheric £2.5bn.

The starting gun was fired on an Evercore-run process in September, which kickstarted a bidding frenzy from private equity houses.

However, the process was cut short by an offer the CFC management team clearly could not refuse: a bid which values the business at north of 40x Ebitda.

It is the highest valuation multiple ever achieved for an insurance MGA and the largest MGA transaction ever announced – and puts CFC into lofty unicorn status, the second in the UK after Zego, if you choose to draw that InsurTech comparison.

First of all congratulations must go to CFC on a deal which surpassed even early elevated expectations. It is a massive coup for founder David Walsh and the management team.

It is also another success story for true London market entrepreneurialism, with Walsh setting up the business in 1999 as Click For Cover – an MGA focusing on digital emerging risks in a booming tech economy, a vision which it certainly would say holds true today.

In building such a highly valued company, Walsh joins the pantheon of London market entrepreneurs who have enjoyed huge successes from EC3 – alongside the likes of David Howden, John Charman, Grahame “Chily” Chilton and Paul Bridgwater.

CFC in numbers table ID 22 Oct CMS.jpg

However, the valuation is what will have caught the attention of the market. And it certainly is a sky-high multiple which rips up the form book of insurance M&A.

It is true to say that in the world of insurance fee business M&A, all boats have been lifted by a rising tide of private equity and strategic interest. MGAs have been a hot segment of the market in recent months, as examined by sister title Inside P&C in June.

However, there is not much beyond InsurTech multiples which even come close to what CFC has secured – and here it is hard to make any real comparisons, given that InsurTech multiples are often generated off revenues rather than Ebitda.

The question on everyone’s lips will be: is CFC really worth more than 40x Ebitda? It’s worth setting out the bull and bear cases to try and answer the question.

The bull case

In many respects, CFC is in a league of its own, and this valuation will not provide a direct read-across to other London MGAs.

It has leaned heavily into owning its own tech capabilities and is an extensive user of machine learning and data analytics to support its underwriting and claims functions.

In an interview with this publication yesterday, CFC CEO Graeme Newman argued that the business has a unique position as a bridge between insurance and fintech (although he didn’t go so far as to describe CFC as an InsurTech).

And if you look at CFC’s circa 40x Ebitda multiple, it shapes up against other tech businesses. Of this table below, the most closely aligned category would likely be “software, system and application” – where the average Ebitda multiple is around 41x.

Ebitda multiples by industry ID 22 Oct.jpg

Its new investor, EQT, has also drawn an indirect comparison. Partner Robert Maclean said in the official statement that CFC was “a truly innovative insurance business with technology at its core and a track record of growth and profitability which surpasses even the most mature fintech businesses we’ve seen.”

And here, Maclean touches on the other major element of the bull case for this valuation: growth.

CFC is undeniably a growth business. It has delivered 35% compound annual growth in Ebitda over the last five years, and 30% over its 22 years of life.

It has a growth profile beyond what you typically see in insurance, and the prospects for future expansion are good.

It has major rating tailwinds in its cyber specialism – which accounts for around 40% of the business – and other areas of specialty.

(Note that other, and much less established, cyber-focused “InsurTech" MGAs in the US have also recently secured funding rounds that give lofty valuations – such as Coalition and At-Bay.)

CFC makes big statements about its distribution model being both unique and scalable, as referenced by group CEO David Walsh in our interview yesterday:

“We are incredibly scalable, efficient and have enormous runway. We work with 2,900 broker offices globally. It’s a flywheel that delivers profitable business. We don’t need to force growth.”

As is always the case with businesses that carry big valuations, a lot of this growth runway is being paid for upfront and contributes to this mega-multiple.

A multiple such as this implies belief that 30% compound annual growth is going to continue – and that CFC will essentially grow out of the multiple.

We are incredibly scalable, efficient and have enormous runway. We work with 2,900 broker offices globally. It’s a flywheel that delivers profitable business. We don’t need to force growth

If that kind of growth can be sustained over the next four to five years, EQT and Vitruvian could exit at a multiple in the 20s and still book a return that would comfortably clear PE’s typical 20% target return.

The bear case

However, there are risks to the growth potential of the CFC business model.

First, its weighting and specialism in cyber is one of its greatest strengths – but the inherent volatility and uncertainty in the class could mean this position is disadvantageous.

CFC is a market leader in cyber and it would argue that its capabilities here would mitigate this risk. However, the market is still untested and it is not unimaginable a “cyber-geddon” scenario could scare the wider market and provoke major capital flight from paper providers in this part of its portfolio.

Of course, this is an extreme tail-risk scenario, and even if it did occur it would not wipe the business out – but a big part of the franchise value could quickly dissipate.

Second, the challenge for CFC now is how to continue to scale the business and continue this growth trajectory which is a key part of the investment thesis. It is simply harder to grow as you get bigger, and the rating tailwind will not always be there to help push the business along.

When you don’t have your own capital, it is harder to gain real scale as an underwriting business. And yes, the new syndicate is a vehicle in which CFC can take some of its own risk, but it is far from a balance-sheet business – in fact by design.

There are almost no examples of truly supersized MGAs – both Dual and RSG are around the $2bn premium mark, and possibly only US-based Amynta is thought to be larger.

However, you have to ask why there is no equivalent of a Chubb in the MGA world. Is it simply that it is too difficult to do? Or is it that the MGA market has not reached the maturity to support such a business yet?

It is undeniable that in securing its £2.5bn valuation, CFC has reached dizzying levels that few would believe possible for an MGA. The next question is, where does it go from here?

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