It was a dizzying year of mergers and acquisitions in the employee benefit sector. It was also a year that saw declining revenue for consultants, a tough year for the spinoff of an insurance giant and a shot in the arm for broker growth.
Organic growth for insurance agents and brokers serving the employee benefits space has risen. Starting in 2010, organic growth for employee benefits was 4.4%. It spiked to 7.1% in 2011 and fell to 4.8% in 2012. Since then, organic growth has seen a steady uptick from 5.0% in 2013 to 5.7% in 2014, and in spite of a slight dip to 5.5% last year, it reached the 6.2% mark by the second quarter of 2016.
A“In a consultative world where there’s already been pretty significant compression of broker compensation, I think they’re coming out of this transition from commissions to a lot of fee-based services on especially larger accounts,” says Kevin Stipe, president of Reagan Consulting, which conducted the study.
The year in M&As
Twenty-sixteen was an explosive year for mergers & acquisitions. From January to September of 2016, there were 344 M&A deals, compared with 338 for the entire year of 2015, according to research from consulting firm OPTIS.
This is not good news for newer and smaller brokerages that could be overwhelmed by larger brokerages. Smaller firms in the employee benefit arena “just don’t have the size or scale to offer the breadth of services and value-add products that the larger firms can, so they become somewhat less competitive,” says Daniel P. Menzer, a CPA and certified M&A adviser at OPTIS.
Menzer notes that the non-stop pursuit for acquisitions continues to chip away at the number of independent agents. “Whether that’s good or bad will likely vary on your perspective,” he adds.
Who is buying these brokerages? According to the OPTIS, it’s most likely a private-equity backed broker, privately-held brokers, publicly-held brokers, banks, and other investors.
And if you’re looking to sell, this was the year to hang your “For Sale” sign. “If you’re an agency owner thinking about the best time to put your agency in play, consider taking action sooner than later,” Menzer says. “Interest from buyers is high and agency valuations are near their peak.”
Some of the M&A deals to capture the spotlight include private benefit exchange operator Connecture’s acquisition of ConnectedHealth, a Chicago-based company that allows employees to shop for insurance benefits online. The deal was worth $5 million in cash. Connecture officials said the deal will help the Wisconsin-based company expand its business into Chicago to operate in the nation’s third largest city and exploit the city’s rich IT infrastructure.
A few acquisitions appeared to be spurred on the IT innovations of the firm that was acquired. Case in point, cloud-based benefit provider benefitexpress acquired the broker-centric benefits administration and online enrollment solution, benefitsCONNECT in August. Under the deal — the sum of which was undisclosed — benefitsCONNECT’s network of insurance brokers will have access to a solution designed for larger employers. Rounding out the IT-focused deals, anti-virus giant Symantec purchased data security provider LifeLock for $2.3 billion.
Not all was smooth sailing in M&A, however. Several acquisitions hits bumps in the road this year and some have still to be resolved. For starters, Anthem’s proposed merger with Cigna Corp. was stalled by accusations from U.S. antitrust lawyers this fall. Justice Department court papers state that the $48 billion merger — the largest in U.S. health-insurance history — “would likely give the enlarged company the power to raise prices for insurance, cut payments to doctors and reduce the quality of service,” according to news reports.
Antitrust charges also dogged Aetna’s $37 billion attempted takeover of Humana this month. Bloomberg reports that the U.S. Justice Department sued Humana and Aetna on the same day in July it filed a motion to stop Anthem’s deal to buy Cigna.
As 2017 starts with the swearing-in of a billionaire president with a strong business background, industry observers will likely have plenty of M&A deals to watch out for in the coming year.
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