2018 Ends On A High Note With A Record Level Of Insurance Agency M&A Activity

2018 broke several M&A activity records according to latest OPTIS Partners Report

While at first blush, 2018 did not appear poised to be a record-breaking year for mergers and acquisitions activity in the insurance industry, that all began to change in the third and fourth quarters of 2018. In fact, according to OPTIS Partners, 2018 has broken several records and has become the most active year on record since the investment banking and financial consulting firm began tracking deals in both the U.S. and Canada.

“The M&A market for insurance agents and brokers continues to surprise and exceed expectations,” said Timothy J. Cunningham, managing director of OPTIS, an investment banking and financial consulting firm specializing in the insurance industry. “There are no signs of anything changing in the near term either.”

As it does each quarter, Chicago-based OPTIS Partners tracks the rate of mergers and activities across the U.S. and Canada, as well as what type of buyers and sellers are doing the purchasing. According to the latest data published in its annual report for 2018, a total of 626 insurance deals were reported in both the U.S. and Canada last year. This is approximately 15 more than reported in 2017, previously the most active year on record.

“The actual number of agency acquisitions was far greater than the number reported, as many buyers and sellers do not report transactions, and some acquirers do not report small transactions,” Cunningham said.

Comparing all four quarters of 2018

The second half of 2018 (2H-2018), comprising the third and fourth quarters, logged 330 reported transactions, with 148 in the fourth quarter alone. Compare that to the numbers from the the first half of 2018 (1H-2018), which had a combined total of 280 transactions.

So while Q2-2018 initially was thought to have signaled a slower pace for the year, the “surge of activity” in 2H-2018 is what made this such a banner year for M&A activity.

P&C Agencies were the biggest sellers in 2018

As the insurance industry continues to consolidate, it comes as no surprise to see that across the country in 2018, property and casualty focused insurance agencies dominated the seller list. According to the report, they accounted for approximately 345 of the 626 deals reported, or 55% of the total amount of 2018 deals.

After P&C Agencies, employee benefits brokers accounted for the second highest number of sales with 23% of the total or 146 transactions. While high, OPTIS noted that this number was down from employee benefit agency sales in 2017, when a total of 174 agencies were sold.

As for buyers, Acrisure continued to outpace everyone with a total of 101 reported transactions this year. Overall there were approximately 142 unique buyers in 2018. This is the lowest number of unique buyers since 2014. Unsurprisingly, the top 10 buyers, led by Acrisure, accounted for the lion’s share of acquisitions, representing approximately 62% of the number of deals reported in 2018.

Additional takeaways from the annual report

The following are some of the other major takeaways from the 2018 annual report, according to Daniel P. Menzer, partner:

• Buyers continue to find attractive agencies to acquire
• Agency valuations continue to creep upwards, pushing revenue and EBITDA multiples to levels seldom if ever seen before
• Internal perpetuation is a challenge because of the increasing gap between the value third-party buyers are willing to pay and internal transaction values. Many owners find these values very compelling.
• Equity and debt capital remain plentiful to fund PE/hybrid buyers.
• Finally, as we’ve said in the past and strive to reinforce every day with our clients:
  • If you’re a buyer, pay attention to cash flow and be careful not to overpay.
  • If you’re a seller, identify the best cultural and operational fit. Take advantage of strong pricing before things change.
  • If you’re neither, ignore all the hype and run your business like a business and strive for improvement every day.

The OPTIS database tracks a consistent pool of the most active acquirers and other announced transactions, and is, therefore, a reasonably accurate indication of deal activity in the sector.