Private-equity firms are still interested in acquiring specialty wholesalers and managing general underwriters, but they are up against some aggressive competitors offering higher deal prices, consultants say.
Speaking to PropertyCasualty360.com for a series of reports on merger-and-acquisition activity in the specialty lines space recently, deal experts highlighted the growing appetites of carriers, wholesalers and large program managers for specialized underwriting agencies in niches like recreational marine, antique cars and slices of the medical-malpractice market.
What about PE firms?
"There is an interest there, but the strategic value is not there," says Chris Hughes, director of insurance distribution for Merger & Acquisition Services in Hartford. PE groups are "looking at more financial-driven valuations," he says, referring to a just-numbers approach that looks at recent past performance to project future profits to determine deal values, rather than strategic fits with other holdings.
Hughes contrasts the lower "financial" bids for these niche agencies with higher "strategic" ones coming from large program managers, basing his observations on his firm's experiences over the past year working on the sales of specialty-niche managing general agencies (MGAs). He notes that a program administrator with two or three dozen programs might have a distribution network with anywhere from 5,000 to 15,000 retailers. Strategically, the program managers realize the value of plugging additional niche product lines into that network, and they are bidding valuations for some deals up to levels like 6- to 8-times EBITDA (earnings before interest, taxes, depreciation and amortization).
Richard Kahlbaugh, CEO of Jacksonsville, Fla.-based Fortegra Financial, an insurance-services firm which acquired wholesaler Bliss & Glennon (B&G) in 2009, sees PE firms taking a backseat to large wholesalers like AmWINS and Swett, as well as upstart Ryan Specialty Group, as he seeks out more wholesalers to add to the B&G platform.
A three-to-seven year time horizon is a complicating factor for PE firms, he says, noting that the cyclical nature of the business does not mirror that investment timeframe at a soft point in the cycle.
PE interest, he says, is currently limited to wholesalers with diversified revenue streams that offer "a clear path to consistent, stable revenue growth," he says, citing the backing of diversified Crump by PE firm J.C. Flowers.
(PE firm Summit Partners owns 60 percent of the stock of Fortegra, a diversified firm that includes business-process outsourcing and payment-protection platforms in addition to wholesale brokerage.)
Still, GCP Capital Partners, a New York-based PE firm, has continued to engage in deals for specialty distributors, including a December 2010 deal to buy wholesaler Dallas-based Southwest Risk, now known as ClearView Risk, from Houston International Insurance Group.
"ClearView Risk has a strong market share in Texas with good penetration in a few other states," says Robert Deutsch, a managing director for GCP Capital, explaining part of the attraction to the wholesaler. He also notes the presence of a strong management team at ClearView Risk that has successfully grown its business.
Deutsch, responding to questions about specialty-insurance deals via e-mail, says that based on recent activity, PE firms increasingly like the distribution space. He says that in addition to a number of broker startups, existing brokers "are trying to buy others for expansion to supplement organic growth. As a result, we compete against both PE firms and others brokers when we acquire a distribution company," he says.
As for deal values, Deutsch says specialty brokers and MGAs generally trade at multiples of earnings that vary based on the size of the company.
"The larger the company, the larger the multiple," he says, adding that small companies could trade for 4-5 times earnings, medium for 6-7 times and large for 8-12 times. "But those are just ballpark [values], and so much is a function of the quality of the business, type of business, location, quality of earnings" and other factors, he notes.
"Plus, all those numbers were lower six months ago and may very well be higher six months from now," Deutsch reports.
Kahlbaugh believes PE firms will sit on the sidelines until the property and casualty market shows signs of hardening, while large wholesalers continue to fight among themselves to acquire smaller wholesalers and specialty MGAs.
"Ultimately, it's going to shake out like retail," he says, noting that the wholesale space will eventually look like retail-broker landscape, with a handful of very large global players dominating. "Then you're going to really drop down to small regional specialists. They'll be just happy doing their thing, and there will be some small consolidations here and there," he predicts.
Kahlbaugh, who is actively seeking to buy regional wholesalers, contends that Ryan Specialty Group—the most active acquirer in the wholesale space, which is headed by Patrick Ryan, the former chair on Aon—"has inflated expectations" with respect to pricing.
It "wouldn't be a stretch" to say that wholesaler deal prices are up 10-25 percent since Fortegra's deal to buy B&G from Willis in 2009, Fortegra's CEO says.
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