HENDERSON, Nev.–The combination of the ongoing credit crisis and losses suffered because of the subprime mortgage meltdown is translating into lower sales prices for agencies, say merger and acquisition consultants.
In interviews held during the 95th annual meeting of the Council of Insurance Agents & Brokers in Henderson, Nev., executives from two major consulting firms said the current economic environment has reduced the number of players in the M&A field, meaning sellers will no longer see the high multiples they did last year.
There are more sellers than buyers, said John Wepler, president of Willoughby, Ohio-based Marsh-Berry, and because of that, the value of agencies is coming down.
"There are fewer buyers and we are seeing a lot of pull-back," said Robert J. Lieblein, managing partner for Hales & Company in Harrisburg, Pa. "There are only a handful in the marketplace."
The financial difficulties at American International Group, which had to seek a loan from the federal government for $85 billion to keep afloat because private companies would not lend, underscores the credit crisis, said Mr. Wepler.
The increased cost of capital is making it more difficult for other players, especially private equity firms, to access the kind of capital they need to finance the purchases.
Another player, banks, are reconsidering their involvement in their insurance interests. The tough times some are seeing with losses from the subprime mortgage meltdown has them supporting their core interests and not investing in insurance.
"Banks are in turmoil," said Mr. Wepler, adding some are selling their insurance assets in order to raise capital.
There are currently only four major players in the insurance agency acquisition world, said Mr. Lieblein. They are all insurance brokers, he noted: Brown & Brown, Arthur J. Gallagher, Hub and Wells Fargo. Hilb, Rogal and Hobbs was a major player, he observed, but with its acquisition by Willis Group Holdings, it is out of the picture.
Mr. Wepler said out of the top 100 brokers in the United States, about 14 of them are in play to be acquired, accounting for approximately $1 billion in revenue. However, whether those deals will take place is now in question due to the economic climate.
Brokers are also being a lot more careful about their purchases, he added, performing their acts of due diligence carefully before pulling the trigger on a deal.
One shift in thinking that is taking place is that while some firms are pulling back on acquisitions, regional brokers are becoming players in buying agencies, but nothing on the large scale, said Mr. Wepler.
The strategy, he noted, is that agencies are becoming more affordable, with prices coming in at the range of five or six times revenues, where in the past it could go as high as seven to nine times an agency's EBITA (Earnings before interest, taxes and appreciation).
Firms continuing to secure high multiples are benefit agencies, something that has not changed in the past. Uncertainty over the future of health care insurance after the election is driving brokers to get into that business, or find agencies that can reinforce what they have. Prices there can range at seven times earnings or higher.
However, being an insurance agency with a book of business is not enough any longer, noted Mr. Wepler. Those who are looking to acquire are looking for good agencies that are profitable, predictable and display substantial organic growth.
"We are seeing a resurgent focus on organic growth," said Mr. Wepler, noting that agencies are changing their thinking about producers, getting rid of those who are failing and bringing in new blood.
Patrick T. Linnert, executive vice president at Marsh-Berry, noted that agency principals no longer want people who aim to build a book of business and plan to live off of it by maintaining it for the rest of their careers.
Marsh-Berry's Woody Ratterman III noted acquirers want to know that the asset they have purchased will be accretive in the future.
This is probably the most profound change that agencies are going through, the executives said, and these will be the successful agencies in the future.
"There is a whole group [of agency principals] that is not willing or not able to contemplate change, and they will deny themselves into selling," said Mr. Wepler.
This article was revised Oct. 8, 949 a.m.
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