After mergers and acquisitions activity stagnated in 2013, agent-broker acquisitions in the first half of 2014 have now surpassed the historic high levels seen in early 2012. The 165 announced M&A transactions of insurance agencies in the U.S. and Canada so far this year represent a 40% jump over the same period in 2013. It was the most active first-half period since OPTIS Partners began tracking this information in 2008. Further, the level of M&A transactions in 2014 is second only to the 181 deals announced in the second half of 2012.
Health care reform has influenced M&A activity for employee benefit brokers. In order to access and provide added value and related ACA resources to clients, certain firms were motivated to sell in order to affiliate with a larger organization. On the other hand, some acquirers viewed the employee benefit business and particularly small accounts (under 50 lives and/or under 100 lives) cautiously, creating push back in deal flow or pricing.
While the distribution of M&A activity among the four major business focuses retail property & casualty, employee benefits and life/financial services, P&C combined with benefits and other (wholesale including MGA/MGU, TPA ) accounted for an equal spread of announced transactions in 2008, since that time, only P&C based firms have increased. Each of the other categories has dropped.
Whats more, organic growth has stagnated for agent-broker businesses, according to Reagan Consulting. Independent insurance agents and brokers reported median organic growth of 5.8% for the second quarter of 2014, a dip from 6.2% reported for the first quarter of 2014 and from 6.9% in the second quarter of 2013, as measured by the Reagan Consulting Organic Growth and Profitability (OGP) survey. Benefits growth, in particular, decreased to 4.6% in the second quarter of 2014 compared to the 5.5% growth rate of Q2 2013.
"Although a 5.8% organic growth rate is still a healthy result, this makes the fourth straight quarter organic growth has remained flat or declined," says Kevin Stipe, president of Reagan Consulting, a management consulting and M&A advisory firm for the insurance distribution system.
Prolonged active period ahead
Another impetus to increased M&A activity comes from the increasing retirement of baby boomers from the workforce. Reflective of Americas demographics, baby boomer principals are commonplace at agency-brokerage businesses.
It looks like the first half of 2014 is the start of a prolonged active period for agent-broker M&A transactions, says Timothy J. Cunningham, managing director of OPTIS, an investment banking and financial consulting firm specializing in the insurance industry. The agency-brokerage business is awash with baby boomer principals. Its estimated that more than 30% of all the equity in the system is owned by them. The industry has not adequately addressed perpetuation/succession planning. Without a sound perpetuation plan in place, the only option for many of aging principals will be to sell to a third party often PE-backed and public brokers to capitalize the value of their agency.
The private-equity backed and public brokers will be front and center to make many of these transactions. And, according to OPTIS research, PE-backed firms continue their dominance as the most active buyer group. PE-backed firms were the most active buyers year-to-date, accounting for 67 agency purchases. They were followed by privately-owned brokers (54 deals), publicly-held brokers (27 deals), banks (nine deals) and insurance companies/ others (eight deals).
There were a few major traditional transactions announced and/or closed in the first-half of 2014, including:
- Marsh McLennan Agency in February acquired San Diego-based Barney & Barney.
- Canada-based Noraxis Capital Corporation sold to Gallagher in May, although the transaction closed in July.
- Marsh McLennan Agency in May acquired Senn Dunn of Greensboro, N.C.
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