One of the most interesting and perhaps important questions raised was whether the prices paid by acquirers are in fact trending down, as is being reported and suggested by some within our industry.

We recognize that certain acquirers may be suggesting that this trend is taking place–or hoping that it takes place. Those that are suggesting this as a trend are attributing the decline to a softening property-casualty market and resulting anemic organic growth, as well as the threat of a potential loss of contingent income throughout the industry–part of the fallout from the probes into industry practices by New York Attorney General Eliot Spitzer.

We at Reagan Consulting certainly recognize these issues and realize they can have an impact on the prices paid by acquirers.

However, in spite of that impact, our experience would suggest that for the most attractive acquisition candidates, any impact that these factors are having is being trumped by the effect of supply and demand on pricing. Let me offer an example to put this point into perspective.

Look at a quality firm from two years ago that had earnings, growth capacity and a balance sheet at a certain level, and consider the price and terms that the most aggressive buyer would have been willing to pay for them at that point in time.

If you take that same identical firm today–with the same revenues, earnings, growth capacity and balance sheet–our experience would suggest that the firm, in the current marketplace, is likely to get a price and terms that are every bit as attractive as they would have received several years ago.

All of this is not to suggest that the softening p-c marketplace or the threats to contingent income should be ignored. These are real issues that can or could have a real impact on agency values.

What we do see is that the supply of large, quality and well-positioned insurance agencies or brokerages is declining through attrition. Simultaneously, we also see demand increasing due to a number of factors. (See accompanying sidebar.)

If you took the targeted commission revenues that each of the currently active acquirers within our industry are looking to acquire and add them up, it is a number that is many times larger than any realistic estimate of the revenues that are there to be acquired.

Therefore, the demand that exists significantly exceeds the supply. Based on what we see, there is no expectation that this demand is going to decrease any time soon.

The impact of supply and demand on pricing is more of a factor on the upper end of the candidate pool. The upper end would include agents and brokers who are larger, of better quality and more strategically positioned as respects location, business mix and strategic value to the acquiring entity.

The impact of supply and demand on pricing will not be as significant for smaller agencies, agencies in less appealing markets, and certainly any agency that brings less strategic value to the acquirer.

It is interesting to also consider the implications of the inability of the market to meet the collective desires of those looking for acquisitions. We see a lot of acquirers looking at acquisition opportunities other than a p-c oriented agency. We see acquirers looking more for benefits-only shops, wholesalers and managing general agencies as well as niche players and specialist operations.

We also see acquirers being more open to, and focused on, growth strategies built around hiring producers–particularly those from other brokerage operations. This is being fueled by a lot of the turmoil existing in the industry, but is also being moderated by the experience of some who have hired talented people only to find that the business didn't come with them.

The challenge of sharing thoughts on pricing, structure, etc. is that we as a firm are actively involved in the market representing both sellers and buyers, as well as working with many firms that are committed to remaining privately held.

No matter what the situation or who we're speaking to, our message regarding values, pricing and structure is consistent. That message consists of the following:

o Quality still matters.

o Value is primarily a function of earnings and the capacity to grow those earnings.

o The quality and stability of your employee base can have a material impact on value.

o Your capacity to grow your revenues and earnings can materially impact the value that should be paid.

o Strategic alignment with the acquirer can materially enhance the value that can and should be paid.

o The structure of the transaction and the tax implications to the acquirer can have a material impact on values.

In addition, we recognize there are a lot of external factors that can't be ignored by either buyers or sellers. Two at the top of the list today are the future of contingency income and the enforceability of restrictive covenants. Both of these can have a material impact on value.

For our agency and brokerage friends, there are certainly a lot of challenges that you are facing today, and I am certain will face in the future.

In spite of those challenges, there is a lot to be thankful for–not the least of which is owning assets that are in limited supply, in a marketplace that has significant demand for those assets.

That demand has created a lot of value for the equity holders within the insurance distribution system. Continuing demand and a continuing limited supply should ensure that those values remain strong for many years to come.

Bobby Reagan is the president of Reagan Consulting, an Atlanta-based financial and management consulting firm working with insurance agents, brokers and financial institutions. He can be reached at [email protected].

Flag: Positive Factors

Head: Why Agency M&As Remain Attractive

Although a softening commercial market and the potential loss of contingency fees might lead some to predict that prices for agency acquisitions could fall, there are a number of countervailing factors certain to keep agency values rising. All have to do with supply and demand issues. There is more demand than supply because:

o To achieve the desired earnings growth, public brokers need to do acquisitions to offset their anemic organic growth.

o Financial institutions still see acquisitions of insurance agents and brokers as the most attractive entry source to insurance sales.

o Many of those who have already gotten into the business see acquisitions as the most attractive way to create meaningful critical mass.

o There are a number of aggressive new entrants into the market that are looking to assimilate significant revenue streams through acquisitions.

“The demand that exists significantly exceeds the supply. Based on what we see, there is no expectation that this demand is going to decrease any time soon.”

Bobby Reagan