Friday, February 22, 2019

Private Equity Targets Insurance Agencies For M&A Activity


By John Hilton February 21, 2019
Insurance agencies and brokerages are hot properties and 2018 merger-and-acquisition activity was the busiest in at least a decade, OPTIS Partners reported.
The OPTIS database logged a record 626 deals in the United States and Canada in 2018, including 330 transactions in the second half of the year and 148 transactions during the fourth quarter.
There were 611 M&A deals in 2017, previously the most active year. Based in Chicago, OPTIS began tracking insurance agency M&A activity in 2008.
“The private equity world has discovered the insurance distribution business and they like the business because its cash flow is reasonably predictable,” said Timothy J. Cunningham, managing director of OPTIS, an investment banking and financial consulting firm specializing in the insurance industry.
Private equity/hybrid buyers accounted for 424 transactions, representing 68 percent of the total, compared with 383 transactions and 63 percent in 2017. In 2008, private equity/hybrid buyers accounted for just 21 percent of transactions, Cunningham noted.
The top five buyers were Acrisure (101 acquisitions), Hub International (59), AssuredPartners (37), Gallagher (36) and Broadstreet Partners (34). All were in in the PE/hybrid category except publicly owned Gallagher.
Privately owned firms completed 107 transactions in 2018, down from 137 acquisitions in 2017. This was the first decrease in this group since 2013.
P/C Getting The Action
By seller type, property-and-casualty-focused agencies dominated the list. They accounted for 345 of the 2018 transactions, 55 percent of the total. Employee benefits brokers accounted for 146 transactions, 23 percent of the total, but were down from the 174 recorded in 2017.
There were 142 unique buyers in 2018, down from 177 in 2017 and the lowest total since 2014. At the same time, the top 10 buyers in 2018 accounted for 62 percent of the number of transactions compared to only 56 percent in 2017 and 52 percent in 2016.
P/C shops are very attractive for several reasons, Cunningham said.
“It’s never going to be a high, high margin business, but it’s going to be a decent medium margin business,” he explained. “And it’s reasonably predictable because of renewals. And it doesn’t require any capital expenditures.”
As it relates to succession planning, the hot market for agencies is giving owners nearing retirement a lucrative option. Likewise, it is serving as a financial curveball for those who have internal succession agreements in place, Cunningham said.
“What happens is they see the differential in the value that they can derive from an internal transaction as opposed to an external sale and the delta there is growing every day,” he said.
Insurance agencies are likely to remain highly sought after for the immediate future, Cunningham said, barring a major geopolitical event or an economic collapse.
“Probably if you had asked me a couple years ago I would have said, ‘I don’t see how it can continue,’” Cunningham said. “But I’ve stopped saying that.”
The OPTIS database tracks a consistent pool of the most active acquirers and other announced transactions, and is, therefore, a reasonably accurate indication of deal activity in the sector.
“The actual number of agency acquisitions was far greater than the number reported, as many buyers and sellers do not report transactions, and some acquirers do not report small transactions,” Cunningham said.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.
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