The year 2012 was one of the most active years for insurance broker mergers and acquisitions. There were a total of 291 publicly announced transactions, according to SNL Financial, which topped the high of 284 deals in 2008 before the bottom fell out of the economy. These likely represent a fraction of the total of the M&A activity as many deals go unannounced to the public, even some by national brokers who usually only put out press releases for deals of $2M or more in revenue.
In my opinion, the increased activity was due to three factors:
1) The looming tax hike that went into effect on January 1, 2013, which increased the capital gains tax rate by anywhere from 33% to 85% of the previous rate depending on the state of residency. A similar surge was seen at the end of 2010 when the Bush tax cuts were initially set to expire but received a last-minute extension.
2) The improved outlook of the P&C market due to a slow economic rebound out of the recession and whispers that a hard market might be getting closer. Through our activity in performing valuations for clients, we noticed that most independent agencies started increasing in revenue late in 2011.
3) The surge in private equity (PE) backed acquirers in the market place, as the number of announced acquisitions done by PE groups more than tripled from 2008 (29 completed) to 2012 (98 completed). Even through the end of 2013, we continued to learn of new PE buyers that previously were not active in the marketplace.
The first half of the year experienced a bit of a lull in activity following the mad rush to beat the tax hike. While only 10% fewer transaction were announced in the first half of 2013 as compared to 2012 (122 vs 133), there were a total of 130 brokerage deals announced in the last quarter of 2012 which is roughly double the prior 12 quarters and more than the combined first three quarters of 2013. The year 2013 turned into a bust overall with one of the lowest levels of activity in years.
The lull through much of 2013 has led to an interesting environment. One thing to understand is that both publicly-traded and PE- backed brokerages have an obligation to use capital and create returns for their investors. With the influx of PE money into the acquisition realm, the demand for insurance brokerages with roughly $1-20M in revenue has increased dramatically. From insider sources, I can say that the PE activity has created a little frustration with the more established national brokers. Acquisitions by publicly-traded brokers dropped by 40% the first half of the 2013. Part of this is due to some large acquisitions by Brown & Brown and Gallagher, but a significant portion is also due to the increased competition. Firms like AssuredPartners, Hub, USI and, more recently, Acrisure are soaking up much of the acquisition opportunities nationwide. On a more regional basis, there are likely another two dozen PE backed groups with $20M or more in cash to spend.
An increase in activity by smaller acquirers has impacted the lower end of market as well. With interest rates remaining low and a stabilizing of the economy, there has been a surge in demand from buyers that are looking to acquire agencies of under $2M in value with third party financing. The number of competitive bidders for some of our client’s agencies has increased by 35-50% in the last year.
Overall, the Law of Supply and Demand is playing out. More buyers are competing for limited supply of acquisition opportunities so the market value for those opportunities is increasing. Just in the last 6 months, we have seen multiples climb by 10-15% with an improvement on the guaranteed amount (i.e. non-performance based portion) of the transaction value.
Will a 10-15% increase in valuations drive another rush for owners to sell? Not likely, but it does alleviate the increased tax burden which otherwise might have been a deterrent. While the changes in the healthcare market have dampened the outlook for benefits brokers, the demand for independent P&C insurance brokerages should continue to remain strong for the next few years until interest rates rise and the current PE bubble plays out. In the short term, buyers will likely get increasingly more aggressive in their bids to win deals.
Should any reading this like to discuss the current market environment, please feel free to give me a call. We have direct contacts with over 2,000 agency buyers from around the country and active agreements with many well-funded buyers that would pay our fee incident to a transaction.
Posted by: Michael Mensch, CBI, M&AMI and Managing Partner