Gearing up for insurance distribution IPOs

When are insurance distributors ready for an IPO? Here are the key factors distributors should consider before going public.

Michael Scherer

Michael Scherer

Partner, Advisory, Financial Due Diligence, KPMG US

+1 212-954-6285

Jonathan Froelich

Jonathan Froelich

Partner, Deal Advisory, KPMG US

+1 267-256-1661

Private equity (PE) firms have investments in insurance distribution platforms with more than $100 billion in enterprise value. Many of these businesses have benefited from five-plus years of EBITDA multiple expansion as well as growth through acquisitions.

Some distributors have chosen to go public in recent years. It’s easy to see why this trend might continue, as going public offers key advantages to insurance distributors. Publicly listed equity, for example, provides a bigger market for company shares and offers a ready window for selling principals who don’t want to wait for the next liquidity event. Recent IPOs have also attracted higher EBITDA multiples than private-market transactions.

The challenge for these businesses—and their investors—will be to determine whether public equity markets are their best source of capital. Because many insurance distribution platforms have grown quickly and their reporting infrastructure may not be fully SEC-compliant, they’ll also have to decide how much to invest in operations to meet public-company reporting requirements.

Insurance platforms have several key factors to consider when evaluating IPO readiness:

  • Integration level of acquisition reporting. After making multiple acquisitions, it’s a good idea for IPO candidates to take steps to centralize and standardize their financial reporting.
  • Availability of historical audited financial statements. Given their significant growth, some insurance distribution platforms have only recently engaged auditors with substantial experience in public-company audits, whose standards and accounting practices differ from those for private companies. Determining whether audited financials are for the right periods, audited by a firm experienced with SEC reporting and prepared on the right accounting basis, is critical in developing an IPO timeline.
  • Sarbanes-Oxley internal control requirements. While there is a grace period for new public companies regarding full compliance with Sarbanes-Oxley documentation and testing requirements for internal controls, the requirements are rigorous. Any company considering an IPO should determine the level of investment in systems and processes needed to ensure compliance.
  • Inorganic growth.  Large private insurance distribution platforms typically have dedicated M&A teams that execute 30 transactions or more annually and will continue doing so as the organization moves toward an IPO. These companies must consider strategies that balance inorganic growth with the financial reporting and controls required for a public listing.

Several insurance distribution platforms have completed successful IPOs in the last few years. Those still contemplating such a move will do well to ensure proper IPO planning: The financial reporting and internal controls required for public companies are both significant and complex. While IPOs offer substantial benefits, they also bring challenges, and any company should think carefully before pulling the trigger.