Independent insurance agency merger and acquisition (M&A) activity has been a wild ride in the past few years and it is not likely to become smooth anytime soon. A consistently active market for the past decade has recently given way to a slow down. However, before anyone gets too comfortable with this slower pace, there is solid evidence that M&As are again on the rise. The question is -- how much and for how long?
According to John Wepler, president of Marsh, Berry in Cleveland, Ohio, since 2000 there have been 200 or more closed agency merger or acquisition transactions nationally per year. That changed in 2009 when transactions were down by 43 percent. Cory Walker, CFO of Brown & Brown in Daytona Beach said, "The past three to four years have been the worst ever for independent agencies. Reasons include government involvement, reduction in pricing, and the declining economy. Many independent agencies saw their revenue drop, with the resulting drop in the value of their agency. Many owners would say they can't afford to sell now."
To understand what is happening now it is helpful to know what drove the process in the recent past. There are four primary buying segments involved in the majority of agency purchases: private equity brokers, banks, publicly traded brokers and independent agencies. For the past decade, the vast majority of all acquisitions were made by banks and national brokers, both public and private. Interestingly, in 2009 the number of transactions closed by independent agency buyers exceeded the number closed by national buyers, the first time anyone can recall that happening in some time.
According to John Wepler, president of Marsh, Berry in Cleveland, Ohio, since 2000 there have been 200 or more closed agency merger or acquisition transactions nationally per year. That changed in 2009 when transactions were down by 43 percent. Cory Walker, CFO of Brown & Brown in Daytona Beach said, "The past three to four years have been the worst ever for independent agencies. Reasons include government involvement, reduction in pricing, and the declining economy. Many independent agencies saw their revenue drop, with the resulting drop in the value of their agency. Many owners would say they can't afford to sell now."
To understand what is happening now it is helpful to know what drove the process in the recent past. There are four primary buying segments involved in the majority of agency purchases: private equity brokers, banks, publicly traded brokers and independent agencies. For the past decade, the vast majority of all acquisitions were made by banks and national brokers, both public and private. Interestingly, in 2009 the number of transactions closed by independent agency buyers exceeded the number closed by national buyers, the first time anyone can recall that happening in some time.
"Private equity brokers became a key factor in agency acquisitions, and in fact spent over $4 billion on four deals alone in 2008," said Wepler. Publicly traded brokers have been making acquisitions to meet the earnings expectations and demands of their stockholders as organic growth has been practically nonexistent for most agencies. Banks have been eager to acquire agencies after passage of Graham-Leach-Bliley a little more than a decade ago. The result was significant demand for agency operations and the revenue they represented, and the numbers became a bit inflated. "Little collateral was required, money was fairly easy to come by, and everyone was trying to buy insurance agencies," said Wepler.
In 2008-2009 some of those factors started to change, ultimately resulting in a reduction in the number of buyers. "In 2008, the economy melted down and access to capital became incredibly difficult if not impossible to obtain," said Wepler. "What was available was very expensive. The result was the private equity buyers all but disappeared, and those that remained had very little chance to put a deal together or do so competitively."
Banks had made the majority of their core acquisitions and had their own issues to deal with, and that latter trend continues. "Right now the banking industry is a net seller of agencies," said Walker. "There are a couple of banks really committed to insurance, but for the most part banks have their hands full with banking and trade regulations." For those still interested in making acquisitions, the payouts dropped to levels many would say are more reasonable, but also less attractive to those positioned to sell.
Activity On The Rise All of that makes sense, but throughout most of 2009 and 2010, acquisition activity has again increased. Several key factors are driving the activity.
Brown & Brown is also seeing increased activity. "In the first half of 2010 we have completed as many acquisitions as we did in all of 2009, so the trend for us is improving," said Walker. "The 2010 year is nearly triple our results in 2009, but we're still not back to the level we were at several years ago, and we think 2009 was an aberration".
Wepler believes the pace of the ramp up in activity will not be sustained. Reason would dictate that those agencies not trying to beat the capital gains deadline will not be in a hurry to sell after January 1. Many that wanted to have sold will have sold. "Once the 2010 deals are done the industry will experience the calm after the storm. Things will be pretty quiet, at least by comparison to what will likely happen by the end of 2010 and whatever spills over into 2011." Valuations will hold, however, as buyer demand will significantly outstrip the supply of sellers.
In 2008-2009 some of those factors started to change, ultimately resulting in a reduction in the number of buyers. "In 2008, the economy melted down and access to capital became incredibly difficult if not impossible to obtain," said Wepler. "What was available was very expensive. The result was the private equity buyers all but disappeared, and those that remained had very little chance to put a deal together or do so competitively."
Banks had made the majority of their core acquisitions and had their own issues to deal with, and that latter trend continues. "Right now the banking industry is a net seller of agencies," said Walker. "There are a couple of banks really committed to insurance, but for the most part banks have their hands full with banking and trade regulations." For those still interested in making acquisitions, the payouts dropped to levels many would say are more reasonable, but also less attractive to those positioned to sell.
Activity On The Rise All of that makes sense, but throughout most of 2009 and 2010, acquisition activity has again increased. Several key factors are driving the activity.
- It is reasonable to assume the current capital gains tax rate of 15 percent will increase to 20 percent as of Jan. 1, 2011. Pundits are making the argument that it could be even higher in a few years. Even if it does not go beyond 20 percent anytime soon, that is still a 33 percent increase in the tax rate, and may be added motivation to sellers who have been on the sidelines.
- Public brokers are still under pressure to show profit to their shareholders. After being less active for the past 12-18 months they are much more interested and engaged in the acquisition process.
- Due to less activity and deals in the pipeline, M&A brokers stopped bringing as many deals to the public brokers and started looking again at local or regional agencies. The result is a ramp up in activity from this group of buyers, which ultimately increased the total pool of potential buyers.
- While the economy is not really improving, it is not performing as poorly as it was. That seems to be giving some buyers and sellers enough confidence to make deals.
Brown & Brown is also seeing increased activity. "In the first half of 2010 we have completed as many acquisitions as we did in all of 2009, so the trend for us is improving," said Walker. "The 2010 year is nearly triple our results in 2009, but we're still not back to the level we were at several years ago, and we think 2009 was an aberration".
Wepler believes the pace of the ramp up in activity will not be sustained. Reason would dictate that those agencies not trying to beat the capital gains deadline will not be in a hurry to sell after January 1. Many that wanted to have sold will have sold. "Once the 2010 deals are done the industry will experience the calm after the storm. Things will be pretty quiet, at least by comparison to what will likely happen by the end of 2010 and whatever spills over into 2011." Valuations will hold, however, as buyer demand will significantly outstrip the supply of sellers.
Florida Positioned For a Comeback? Florida is again becoming a desirable location for acquisitions. "Florida is the number one state of demand for agency acquisition for my clients," said Wepler. Some of the same factors that are creating such a difficult insurance market also may be sufficient to move acquisition activity up a few notches.
Marsh Berry statistics show that retail agencies declined in organic growth by seven percent in Florida versus 1.7 percent nationally. While that does not bode well for immediate bottom-line profit, potential buyers may see those numbers differently.
Then there is the issue of how much rate is required to get Florida premiums to a level appropriate based on loss history.
"I think most insurance industry specialists would agree with this statement: The insurance premiums being paid in Florida are less than they should be," said Wepler. If correct, the combination of increasing policy rates and improving economic conditions could spell opportunity in the retail agency arena, and that could make agency acquisitions a good play again. Related story, J. Hyatt Brown Talks About Business, Florida, and Politics
Marsh Berry statistics show that retail agencies declined in organic growth by seven percent in Florida versus 1.7 percent nationally. While that does not bode well for immediate bottom-line profit, potential buyers may see those numbers differently.
Then there is the issue of how much rate is required to get Florida premiums to a level appropriate based on loss history.
"I think most insurance industry specialists would agree with this statement: The insurance premiums being paid in Florida are less than they should be," said Wepler. If correct, the combination of increasing policy rates and improving economic conditions could spell opportunity in the retail agency arena, and that could make agency acquisitions a good play again. Related story, J. Hyatt Brown Talks About Business, Florida, and Politics
