Since late 2008 it's been widely reported that insurance mergersand acquisitions have been down and out. The deal activity that didoccur was led largely by a new group of independent agency andprivate equity-funded buyers that capitalized on opportunitiestraditional M&A heavyweights had to pass on.

However, optimistic reports from advisors began to surface asearly as mid-2009, including a June report from Deloitte thatreported "insurance M&A likely to increase in late 2009."Activity has increased in the second half of 2009, and deals areoccurring in all buyer segments. Today, both the traditional buyersof agencies and the new group of buyers, including Marsh &McLennan Agency and a new set of private equity-backed firms, arelooking for deals, albeit with a refined palette in search ofquality.

Down, not out
According to TimothyCunningham, principal of Chicago-based OPTIS Partners LLC, the paceof M&A activity is historically set by conventional buyers suchas Arthur J. Gallagher & Co., Hub International andBrown & BrownInsurance. "When economic calamity partnered with the softinsurance market in 2008-2009, these buyers pulled backsignificantly," he said.

"The first seven months of 2009 are off 2008's pace by 43percent, bringing the market barometer to 103 transactions," wroteAudra Szollosy, senior vice president at New York-based Hales & Company, in aSeptember 2009 article. "By historical standards, Arthur J.Gallagher (8), Brown & Brown (5) and Hub International (5)typically lead the insurance brokerage category of most activeacquirers. Making a splash this year and nuzzling in between ArthurJ. Gallagher and Brown & Brown with six deals year-to-date is... Ascension Insurance."

Despite the weak economy, Ascension Insurance is one ofthe fastest-growing U.S. insurance brokers. Backed by privateequity investors Parthenon Capital and Century Capital, Ascension's"buy and build" business strategy, which values local managementand expertise, offers agencies the promise of support and capitalwith more autonomy than is historically the case with traditionalbuyers.

This year saw a rise in the "unconventional" buyer who was wellcapitalized, Cunningham said. "Ascension Insurance is a goodexample of this type of buyer. They went from $0 to $75 million andacquired 10 agencies since early 2008. In a market like this it'sclear that Ascension is ready to execute their business plan."

Based in Kansas City, Mo., Ascension is ranked among the Top 35largest agencies by revenue size, with more than 400 employees and25 locations nationwide. The company expects to grow to $200million in revenue over the next 5 years.

New teams in the game
Deal activity changed dramatically during 2009 as traditionalbuyers, including the historically active private equity firms andbanks, sat on the sidelines, while regional independent agenciesand a new group of private equity capitalized firms picked up theslack.

"Over the last decade, banks were the most active acquirer,"said John Wepler, president, MarshBerry, Willoughby, Ohio. "Assetdevaluation, nonperforming loans, increased capital requirementsand higher required underwriting standards caused many banks toshift their focus to their core business. While a number ofwell-capitalized banks are committed to insurance, banks with aweak capital position have either been looking to sell theirinsurance subsidiary or are in hiatus mode with respect toacquiring." For example, BB&T acquired Oswald Trippe &Company in November of 2009, reinforcing its commitment toinsurance despite a tough economy.

According to Wepler, during late 2008 and early 2009, manypublic broker buyers and national brokers promoted the fact thattheir pricing had come down given pressure from shareholders, thesoft market, risk compression within their book of business, andchallenging organic growth. "As a result, it is really no surprisethat public broker and national broker deals were down sharplyrelative to other buyer segments," Wepler said.

The November acquisition of Insurance Alliance in Houston byMarsh & McLennanAgency represents the giant broker's first deal in the middlemarket. This deal is symbolic as it represents a new strategy forthe world's largest insurance broker and new competition to buyersin search of deals.

While traditional buyers took a breather during early 2009,independent insurance agency buyers captured the flag on dealactivity. This trend started in December 2008, with Leavitt Group's acquisition ofJenkins Insurance Group and Starkweather &Shepley's acquisition of Preston Agency. It continued in 2009by independent agency buyers such as Cottingham & Butler, Seubert & Assocs.,McNeary Inc., 53Group Holdings, and York International Agency LLC.

Then there are the private equity funded buyers. "During 2009many of them became tarnished in the eyes of investment bankers andsellers by promoting aggressiveness then delivering abusivelysubpar pricing or rewriting deals numerous times during duediligence," Wepler said. "While this may be prevalent, there areexceptions. Ascension Insurance treats acquisition targets aspartners, has demonstrated to the market a proven willingness toreach strategic pricing, and is very fair during duediligence."

Ascension is not the only private equity firm that has recentlyclosed deals. Other firms that have been active include Bearence Management Group andEPIC.

A new approach to valuation
"With lesscompetition and a conservative approach, transaction values droppedin 2008-2009," Cunningham said. "In addition, deal structurechanged, with greater emphasis on performance and value deliveredin an earn-out."

Though the basics of agency valuation are the same--determiningfuture cash flow and return to the buyer--how you arrive at thesebasics has changed. Although each transaction is different,performance-based valuations played a greater role this year.Insurance agencies that understand that achieving the maximumvaluation is conditioned upon future performance have faredwell.

All buys not created equal
The stagnation within the M&A market has run its course andindustry insiders believe 2010 will show a marked increase inactivity. Traditional buyers have returned to the market, bankscommitted to insurance are again active, and independent agenciesand private equity firms with capital are in the hunt. Quality,however, has become a prerequisite.

"Buyers have become much more selective than in past cycles,"Wepler said. "The level of forensics on due diligence by buyers hasnever been higher. And buyers today are much less interested in anaverage agency and far more interested in those that can drivesustainable, profitable, organic growth. All deals are not equal inthe eyes of the buyers, and a market premium is reserved for thoseagencies that perform."