Agency mergers-and-acquisitions activity has come roaring back after plummeting during the economic crisis of 2008-2009. In fact, 2011 was the second-most-active year for M&A in the insurance industry’s history—only 16 deals short of the all-time record of 301 deals announced in 2008. If current trends hold, 2012 may set a new record for deals made.
Most of the past decade reflected a “seller’s market” for agencies, in which an abundance of buyers chased a relatively small number of sellers and pushed valuations up to extraordinary heights—particularly in 2007-2008. Then, for a short time in 2009 after the economy stalled, both buyers and sellers backed away from M&A, retreating due to economic uncertainty.
Perhaps the biggest story of 2012 is that for the first time in memory we seem to be close to a state of equilibrium between buyers and sellers. Buyer demand has returned with a vengeance, as major brokers are looking to supplement their own relatively weak organic growth; and as upstarts such as Marsh & McLennan Agency and Assured Partners are trying to rapidly build critical mass.
Buyer demand is nothing new—it seems to be a permanent fixture of the insurance-brokerage landscape. But the difference is that in 2012, for the first time in memory, sellers are entering the market in sufficient numbers to potentially match this heavy buyer demand of late.
This buyer-seller balance is being fueled by three fundamental issues:
1. Rising valuations. During the past decade, buyers increased valuations in an attempt to stimulate seller interest, even in the face of stagnant or declining agency performance. Especially in 2007 and 2008, as the economy began to stall and agencies were facing stiff P&C pricing headwinds, buyers were increasing prices to get deals done. But in the doldrums of 2009 and 2010, valuations declined.
Today, agency valuations are once again rising but for a completely different reason: Agencies are performing better than they have in years, fueled by the best combination of P&C pricing and economic growth we’ve seen in the past decade. In Reagan Consulting’s quarterly “Organic Growth and Profitability Survey” of large agencies, agency owners are expecting to grow by 5.6 percent in 2012, which would be the highest growth rate since 2006. And profit margins are expected to hit 19 percent, which would be the highest profit margin since 2007. What this means is that buyers can afford to pay higher prices than in recent years, even as they earn better investment returns off of their acquisitions.
2. Sellers’ concerns over tax-rate changes. There is no question that the U.S. faces a massive fiscal crisis. With entitlements ballooning and the federal government spending $1.41 for every dollar of revenue it collects, something is going to have to give. Not even the U.S. government can sustain perpetual trillion-dollar deficits.
Tax increases are coming. But with a presidential election looming in November and a closely divided Congress, no one knows where the additional tax burden will land. There is concern that both income taxes and capital-gains rates will increase—but this alone isn’t sufficient to trigger a sale of most agencies. Nevertheless, for those agencies considering a sale during the next one to three years, uncertainty over tax increases is causing some to go ahead and sell now.
3. Seller demographics. The baby boomers are now retiring, and many still own insurance agencies. Our research indicates that the typical agency owner is in his or her early-to-mid 50s—and many are considerably older. For those agencies without a clear succession plan in place, a merger or sale eventually becomes inevitable. Given the demographics of the insurance industry, an increasing number of agencies will find themselves selling as the massive baby-boomer generation bids adieu.
M&A activity in our industry is a sign of health—and the current equilibrium in supply and demand for agents and brokers signals continued strong deal activity in 2012.