Massachusetts Was The Second Most Active State For M&A Transactions in Q2 2016

M&A Q2 Transactions in 2016 continues its “fast pace”

In its second quarterly report of the year, Chicago-based OPTIS Partners says that insurance agency mergers and acquisitions in the first half of 2016 are shaping up to be the “second-most-active six-month period” since the consulting firm began tracking M&A transactions in 2008.

While the first quarter of 2016 saw an all-time high of 109 reported transactions says the agent-broker M&A advisory firm, the second quarter has continued the pace. As of the end of the Second Quarter, there had been 232 announced deals, one shy of the 233 deals done in the first half of the record breaking 2015.

“Buyers and sellers continued to feed their hearty appetites for deals and push up the M&A activity trend line,” said Timothy J. Cunningham, managing director of OPTIS, an investment banking and financial consulting firm specializing in the insurance industry.

Overall, Agency M&A activity has climbed steadily over the past four years, other than the spike at the end of 2012 and related drop in early 2013 related to the tax-law change, he added.

“We anticipate the recent strong industry-consolidation trend will continue for the near term as acquisitions are an important growth strategy for many firms, especially those backed by private-equity capital,” Cunningham said.

How the report breaks down the numbers

Each quarter, the OPTIS report breaks down buyers into the following five groups:

Private-equity backed brokers,
Privately held brokers,
publicly held brokers,
Banks,
And all others.

As of June 2016, PE-backed buyers continued to dominate the M&A field with the completion of 114 transactions so far this year. Some of the most active PE-backed companies so far this year include Boston-based Risk Strategies, Boston-backed The Hilb Group and Hub International to name just a few.

Following the PE-backed buyers were the Privately-owned brokers, who were the second-most active group of buyers. As of the end of 2Q, this group had completed 68 deals—or 29 percent of the total M&A transactions this year, up from 24 percent during the year-earlier period. Of note, Cross Insurance made the list of the eight most active Privately-owned brokers this quarter.

After these two groups, comes Publicly-traded brokers with 24 announced deals so far this year. This number is only three deals off from the first-half count of 2015. This include many well-known buyers such as Gallagher, Brown & Brown and Marsh McLennan Agencies.

In fourth position are Banks, with 15 announced transactions this quarter. This number represented three more deals than during the first half of 2015. Most important to many Massachusetts insurance professionals is the fact that Eastern Insurance was included in this list of the six most active buyers in this group.

Surprisingly, overall insurance companies and other buyers have played little to no part in the surge of M&A Transactions and continue to remain relatively inactive.

Overwhelmingly, the bulk of M&A Transactions continue to focus on agency acquisitions of P&C shops as well as P&C/Benefits brokers, with the former logging 124 announced transactions and the latter 40 deals. As for employee benefits agency sales there have been a total of 43 so far this year.

The following chart gives an overview of buyer type trends.

Agency Valuations Near Peak

“If you’re an agency owner thinking about the best time to put your agency in play, consider taking action sooner than later,” said Daniel P. Menzer, CPA, partner with OPTIS. “Interest from buyers is high and agency valuations are near their peak.”

Most importantly, a buyer preparing for an agency acquisition in this current market need to crunch the numbers and do due diligence.

“A premium price paid for acquisition can have significant adverse implications on the long-term viability of your agency,” explains Mr. Menzer. “If the agency you buy does not perform up to snuff and you do not have the capital base to absorb the shortfalls, you can get in a lot of trouble.”

So what’s happening in Massachusetts?

Turning towards the Commonwealth, OPTIS Partner’s Dan Menzer confirms what many in the Massachusetts insurance industry already know – that the rate of agency acquisitions here has been high. In fact, Mr. Menzer notes that Massachusetts tied with New York this Quarter as the 2^nd most active state, with only California logging more M&A Transaction activity during the Second Quarter of 2016. As for the year thus far, Massachusetts is in third place with 18 transactions for 2016, just behind New York with 22 and California with 28 deals. Rounding out the top five states are Texas in fourth place with 16 transactions followed by Illinois with 12.

Surveying this uptick in activity in Massachusetts, Mr. Menzer says that “Massachusetts continues to be a very active marketplace for insurance broker acquisitions, running well ahead of its “pro rata” share based on size/population.”

As for a breakdown of buyer types in Massachusetts, it is important to note that the following data may not reflect the total number of actual transactions since it is not mandatory to announce deals publicly.

With that said, data shows that there were 10 transactions completed by Massachusetts sellers during the 2^nd Qtr-2016 by. 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 different banks,
5 different privately owned firms,
and 2 different private-equity backed brokers.

2016 Transactions in Massachusetts

The following is Agency Checklists updated list of Agency Acquisitions so far in 2016. Please note that while we try and keep our 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.