Insurance brokerage M&A picks up speed

After mergers and acquisitions of insurance agents and brokers soared to an all time high in 2018, the buying spree is set to escalate, industry experts say.

The insurance industry hit its highest number of total transactions last year with 626 deals, surpassing 2017’s high of 611, according to a report from investment banking and financial consulting firm Optis Partners. Timothy J. Cunningham, managing director of Optis says he thinks the consolidation will continue to pick up steam in 2019.

“I don’t see any reason for it slowing down,” he says. “I think valuations are their peak, they’ve inched up every quarter.”

Cunningham says private equity likes the insurance industry because cash flows and margins are reasonably predictable, which could be one reason why so much M&A is happening. In addition, some firms are sold every couple of years in effort to monetize valuations.

“In many cases they do enough of these tractions every five years, plus or minus, they get higher and higher valuations,” Cunningham says.

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In the employee benefits space, technology will likely not be able to replace the personal consultative way brokers sell, he adds, which means there is value in adding additional advisers to a firm.

Last year, there were multiple acquisitions reported by large brokerages, Optis says. Included on the list was Brown & Brown’s purchase of The Hays Companies in December and USI Insurance Services acquisition of Key Insurance and Benefit Services in March.

The top five buyers last year were Acrisure (101 acquisitions), Hub International (59), AssuredPartners (37), Gallagher (36) and Broadstreet Partners (34). Most of the M&A activity was concentrated among the top buyers. The top ten in the industry accounted for 62% of the number of transactions in 2018, up from 56% in 2017, Optis reports.

“It’s kind of a perfect storm in a positive way,” Cunningham says. “You’ve got a well-capitalized very robust buy side group and you’ve got a lot of seller inventory, which is creating a lot of deal flow.”

In an interview with Employee Benefit Adviser in December, Jason Liu, CEO of insurance broker software company Zywave echoed these thoughts. Liu predicts M&A activity will continue to increase in 2019. Zywave struck a deal to acquire another software company, Code SixFour in October last year.

“Consolidation certainly continues to be a huge trend in the marketplace,” Liu tells EBA. “It’s not just the top 20 brokers consolidating, it’s now the top 100 consolidating. I think consolidation is gaining steam instead of losing steam. There are even bigger and bigger acquisitions happening.”

Cunningham says the amount of agency acquisitions could be even greater than these numbers indicate. Some buyers and sellers don’t report small acquisitions, or don’t report transactions at all, he says.

It’s also unclear when the M&A spree will stop, Cunningham says. While there may be an unplanned event that could impact the industry, for example a recession, right now there isn’t much preventing consolidation.

“The rhetorical question is, when might it end?” he says. “In spite of the Fed pushing up interest rates a little bit, there’s a lot of capital and there’s a lot of debt and equity capital. There’s nothing on the horizon that’s going to be a challenge to the business. I think it’s going to continue.”

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