Deals Slow Slightly, But Buyers On Prowl

Spitzer probe spurs divestitures of wholesalers; gives somebuyers pause

Agency mergers and acquisitions are proceeding at a slightlyreduced pace compared to 2004, and external investigations intobusiness practices might be one of several culprits. A closer lookreveals that growth by acquisition continues to be at the forefrontof the industry.

During the first quarter of 2005, there were 60 announcedacquisitions of insurance brokers–a slight dip from the 67announced transactions in the first quarter of 2004. However, mostindustry experts concur that the overall pace should mirror orexceed the figures of prior years.

The blockbuster deal of the year so far has been Wachovia'sacquisition of Palmer & Cay Inc., which reportedly had revenuesof $144 million in 2003. Wachovia stated in its press release thatthe combined operations will have over $400 million in annualrevenues, which would make the firm one of the top-10 insurancebrokerages.

This acquisition is significant not only for its size but alsobecause Wachovia has not been particularly active in makingacquisitions of insurance brokers over the past several years. Thetransaction was announced right after the end of the first quarterand therefore has not been included in first-quarterstatistics.

Another significant 2005 transaction was the acquisition of Hull& Company Inc. by Brown & Brown. Hull & Company is awholesaler that had annualized net retained revenues ofapproximately $63 million. In July 2004, Brown & Brown hadraised $200 million in a private placement, and appears to beaggressively looking for ways to deploy this cash through strategicacquisitions.

Brown & Brown's acquisition of a wholesaler is in markedcontrast to recent actions by Willis Group Holdings and Aon. OnFeb. 15, Willis announced that it sold off its U.S. wholesaleunit–Stewart Smith Group–to American Wholesale Insurance Group Inc.Stewart Smith reportedly had revenues of $75 million in 2003.

The following day, Feb. 16, Aon announced that it was exploringthe sale of Swett & Crawford, which reportedly had revenues of$267 million in 2003. Marsh & McLennan Companies Inc. alsoannounced plans to divest itself of a subsidiary–its private equityunit MMC Capital–to a team of MMC Capital employees.

These divestiture announcements by three of the world's largestbrokers reveal a heightened sensitivity to having any appearance ofa conflict of interest.

With investigations by New York State Attorney General EliotSpitzer casting a negative image on the industry, it would not besurprising to see additional divestitures coming out of the largestindustry firms. There are numerous privately backed investmentgroups and other very large firms that stand ready to seize thesetypes of opportunities.

Another area that might come under close scrutiny is thereinsurance brokerage arms of these companies. Mr. Spitzer has beeninvestigating possible tying arrangements, where reinsuranceplacements by an insurance carrier affect the amount of retailbusiness that is placed through this same carrier. The businessmodels of the largest brokers could look significantly differentonce the fallout from the investigation settles.

Aside from MMC, it appears that the other publicly-tradedinsurance brokers continue to aggressively pursue acquisitions.Table 1 (click link below) lists acquirers who announced more thanone acquisition during the first quarter of 2005.

Stewart Information Services continued to snap up titleinsurance agencies across the country. In addition to Hull &Company, perennial acquirer Brown & Brown purchased twowholesalers as well as two retail operations.

Willis continued to acquire internationally, and also made twoU.S. acquisitions of benefits firms. (In the interest ofdisclosure, WFG Capital Advisors LP advised on the sale of one ofthese benefits firms–CGI Consulting Inc.) Arthur J. Gallagherbought two retail operations as well as the reinsurance brokerageassets from JLT Re Solutions Inc., while Aon's three acquisitionswere all international in nature.

While the number of transactions dropped slightly from lastyear's first quarter, there was a more significant decline in termsof deal value (Table 2). First-quarter 2005 transactions had anaggregate deal value of $112 million when compared to $407 millionin the same period last year. Much of this disparity will level outwith Wachovia's acquisition of Palmer and Cay in the secondquarter; although the announced value may not be disclosed itshould clearly serve as a footnote.

Last year's results included a number of acquisitions ofsignificant size, including:

o Hub International's acquisition of Talbot Financial Corp. ($90million).

o LandAmerica Financial Group's acquisition of County TitleHolding Corp. ($90.5 million).

o Willis's acquisition of Willis A/S from its management group($57 million).

o Brown & Brown's acquisitions of Waldor Agency Inc. ($39.5million) and Statfeld Vantage Insurance Group L.L.C. ($34.5million).

o U.S.I. Holdings' acquisition of Dodge Warren & PetersInsurance Services Inc. ($38.6 million).

In comparison, the largest announced deal value during the firstquarter of 2005 was National Financial Partners' acquisition ofHighland Capital Holding Corp. ($48.4 million). Transaction valuesfor smaller deals are not typically disclosed, which can createdisparity between announced figures and the overall considerationpaid.

An interesting dichotomy exists between the number ofacquisitions of retail and wholesale insurance brokers (see Table3). In the first quarter of 2005, there was a decline in the numberof retail operations acquired compared to prior year. In contrast,the number of wholesale acquisitions increased, albeit off of asmaller base.

Brown & Brown was the most active acquirer of wholesalers,announcing three deals during the first quarter of 2005. WhileWillis has already shed its wholesale operation and Aon is clearthat it will divest itself of this type of business, it appearsthat other competing brokers have no concerns about acquiring thesetypes of firms.

A review of the number of insurance agencies and brokeragesacquired by type found that many of the categories showed a slightdecrease from 2004 (see Table 4). One notable exception wasproperty-casualty personal lines, where the majority of activitytook place among personal auto insurance brokers, as well astechnology-oriented personal lines firms, including InsLogic Corp.and ComparisonMarket Inc.

The primary bulk of acquisitions still resides within thefull-service and p-c commercial segment.

Aggregate revenues of firms acquired during the quarterdecreased slightly from last year as well, to $263 million in 2005compared to $299 million in the first quarter of 2004 (see Table5). Significant announced transactions include:

o American Wholesale Insurance Group's acquisition of StewartSmith Group from Willis ($75 million).

o Brown & Brown's acquisition of Hull & Company Inc.($63 million).

o National Financial Partners' acquisition of Highland CapitalHolding Corp. ($62 million).

Similar to the announced deal value statistics, there isinconsistent reporting of the revenue volume of many of the smalleracquisitions, which can cause volatility in correlatingstatistics.

The outlook for consolidation continues to support a very highlevel of activity.

Concerns over the outcome of the contingent commission debatehave caused some firms to question the long-term viability of thisrevenue segment. However, most industry participants have concludedthat while the overall compensation structure may ultimatelychange, it is highly unlikely that regulators or carriers will takea bite out of the broker's share of the pie.

Most leading acquirers contend that their acquisition pipelinesare well stocked, and they will continue to seek out strategicopportunities in light of the debate over contingency fees. It ishighly likely that announced transactions will continue to trendupward during the course of 2005.

Steven Wevodau is a managing principal and Allen Go is adirector at WFG Capital Advisors in Harrisburg, Pa.