PE Brokers and Banks are leading the buying spree as valuations stay high
The year 2016 is shaping up to be a banner year for agency acquisitions says OPTIS Partners in its latest quarterly report. Based in Chicago, OPTIS Partners publishes a quarterly report covering U.S. and Canadian agencies selling primarily property-and-casualty insurance, agencies selling both P&C and employee benefits, and those selling only employee benefits.
According to the investment banking and financial consulting firm specializing in the insurance industry, the number of insurance agency mergers and acquisitions increased over the first nine months of 2016 to 344. In total, 108 deals were announced during the third quarter of 2016 as opposed to 104 in 2015.
“M&A activity continues to increase,” said Timothy J. Cunningham, managing director of OPTIS Partners. “Achieving organic growth is challenging, so acquisitions are key growth strategy for many firms, especially those backed by private-equity capital,” he added. The following chart takes a look at M&A Transactions by month:
How the quarterly report breaks down the numbers
Private-equity backed firms continue to lead in total acquisitions in the M&A market, with one firm, Acrisure, making an impressive 44 acquisitions so far in 2016. In second place is Hub International with 29 completed acquisitions so far this year. Also making the list of the top ten PE-backed firms with the most acquisitions to date were Gallagher and Boston-based Risk Strategies. As a result, it should come as no surprise that PE-backed purchases account for more than half of all reported transactions over the first three quarters.
As for privately owned broker group purchases there also has been a slight uptick in activity while public broker activity has slipped a bit during 2016. Of note, particularly in the Massachusetts marketplace, is the the increasingly important role that banks have taken on in the M&A market. Most surprisingly, noted Mr. Cunningham, was the fact that “…bank acquisitions are up almost 50 percent from last year.”
Deals by seller type
In order to make sense of the M&A market, the OPTIS report breaks down buyers into the following five groups:
- Private-equity backed brokers,
- Privately held brokers,
- publicly held brokers,
- And all others.
The following chart, provided by OPTIS Partners, breaks down insurance agency mergers and acquisitions, in both the US and Canada, by by buyer type. The comparison dates range from 2014 through 2016, comparing first nine months of 2016 to first nine months of the years 2014 and 2015.
Unsurprising to many in Massachusetts, property-casualty agencies continue to be the main focus of acquisitions across the nation. These type of acquisitions currently account for approximately 53 percent of all the deals made to date this year. Another growing focus of acquisitions are the purchase and sales of employee benefits brokers which made up of 19 percent of the total acquisitions completed so far this year.
Similar to the chart above, this one gives a sense of how each seller group has performed over the same time period.
“Strike While Iron Is Hot”
“This period of insatiable buyer appetites and aggressive pricing won’t last forever,” said Daniel P. Menzer, CPA, partner with OPTIS. “If you are a potential seller, consider acting sooner than later while the irons are hot and the pricing is favorable.”
“If you are a buyer, make sure you are doing your homework on the potential seller and have fully evaluated their risk and growth potential. Don’t overpay,” he said.
Unfortunately, notes Mr. Menzer this is not often the case. Despite the current “furious pace of M&A transactions”, most agency owners aren’t invested in buying or selling at any given point. Rather for them, he says “patience is a virtue.”
“If you’re neither buyer nor seller, ignore all the hyperbole and focus on growing your agency and improving your metrics every day. Keep your long-term plans in sight and take the necessary steps to position yourself to achieve your goals” Menzer said. If not, though, Mr. Menzer urges you to “strike now, while the iron is hot.”
So what is happening in Massachusetts during Q3?
For even the casual observer in the Massachusetts insurance marketplace, it is obvious that mirroring national trends, there is an increasing consolidation of the marketplace in the Commonwealth
While noting that there has been no dramatic change in Massachusetts since the last quarter, Mr. Menzer reiterates that agents now should be thinking hard about what their short term/long-term plans are. The buying spree won’t last forever, so agents who are considering the sale of the agency should act sooner than later. As for buyers, Mr. Menzer warns about getting caught up in the “appeal of the deal” which can result in overpaying for an agency. For a smaller firm, warns Mr. Menzer, the consequences could be devastating particularly if that agency is not adequately capitalized when the debt has to be repaid.
As for those who are neither a buyer or seller, Mr. Menzer recommends ignoring all the valuation hype and just focus on growing your business to make it better today than it was yesterday. As he notes, “M&A information can be interesting – but just like finding out housing prices in your neighborhood are up 20%, if you’re not moving, who cares?”
The only issue, ultimately, that all agents have to think about at some point is agency perpetuation concludes Mr. Menzer. “…[O]ur industry spends a fair amount of time talking about agency perpetuation. The reality is that many, but not all, acquisitions are the result of either a lack of an effective perpetuation plan, or a failed perpetuation plan. Agency perpetuation is hard on everyone. Selling is easy, and much more profitable (financially) than perpetuation…and this has certainly been the more popular option of late.”
2016 Transactions in Massachusetts
Data Agency Checklists has compiled and compared with OPTIS partners shows that for this last quarter including the summer months, there were six transactions completed by Massachusetts sellers during Q3 2016. Of that number, nine of them were focused on P&C agencies while the remaining deal involved one Benefits agency. As for buyers, these 10 deals included
- 3 private broker;
- 2 private-equity backed brokers;
- and 1 bank deal
Our running list of M&A transactions in Massachusetts in 2016
The following is Agency Checklists updated list of Agency Acquisitions so far in 2016. Please note that while we try and keep our own data up-to-date as much as possible, we cannot guarantee that we have included every transaction that has taken place in the Commonwealth so far this year.
January 2016 (Q1)
February 2016 (Q1)
Two Mass. Agents in Leominster Join Forces (The Judy A. Mendolusky Insurance Agency and The Anderson, Bagley & Mayo Insurance)
Brown & Brown, Inc. Acquisition of Social Security Advocates for the Disabledv (Norwell)
March 2016 (Q1)
April 2016 (Q2)
May 2016 (Q2)
June 2016 (Q2)
July 2016 (Q3)
August 2016 (Q3)
September 2016 (Q3)