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Portfolio > Alternative Investments > Private Equity

Shifting into high gear: M&A deal-making among brokerages

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The pace may be fairly described as torrid. 

In 2015, mergers and acquisitions among insurance brokerages across all lines — life, disability income and long-term care insurance, property & casualty insurance, employee benefits, business insurance, among other specialties — totaled a whopping 326 deals, surpassing the 325 transactions recorded in 2012, according to MarshBerry, a financial consulting and M&A advisory firm. By year-end 2015, the number of announced M&A agreements was expected to rise to 400. That doesn’t include an estimated 50 to 75 announced deals falling under the radar. 

The titans among the acquiring firms — Brown & Brown, Marsh & McLennan Agency and Arthur J. Gallagher & Co. — collectively boast $2 billion in annualized revenue. Aiming to expand further, the firms’ war chests for buyouts are conservatively pegged at $100 to $150 million per year. 

These behemoths are not alone in going on a buying spree. Some 25 to 30 brokerage firms, including more than a half-dozen represented at the 9th Annual SNL Insurance Brokerage Summit held in New York in early November, also are gobbling up the industry’s small and mid-size players. And few foresee an end to the frenzied activity.  

M&A drivers 

“The market is manic,” said Alliant Insurance Services Senior Vice President Stephen Farr, who spoke on a panel about the deal making at the SNL Summit. “There are a lot of deals to get done. There’s incredible demand; it’s truly a seller’s market.” 

What’s fueling that demand? Several factors, starting with the growing number of brokerages interested in acquisitions. The market’s buyers, said Clark Wormer, Director of M&Aat HUB International, number five to six times the handful of players doing deals up until the recession of 2007-2009. 

“There are probably 30 well-capitalized buyers that are looking to do from $50 million to $200 million per year in [acquired revenue],” said Wormer. “There isn’t enough supply to fulfill all the demand.”  

Aiding and abetting the buyers are private equity firms that are providing tens of millions in capital to fund the deals. These include venerable names in the private equity world — Sandler O’Neill & Partners, Oak Street Funding, Madison Capital Funding, Houlihan Lokey — that want a piece of the action. 

Also fueling the transactions are rock-bottom interest rates. Though long the bane of life insurers because of the negative impact on their investment yields and profits, low interest rates have enabled the buyers to purchase brokerage firms at low cost, increasing their leverage. 

This combination of factors — a surge in private equity-backed buyers and the prevailing low cost of capital — has resulted in sky-high valuations, most especially for the gems among the targeted brokerage firms. Whereas in past years, the price paid for brokerage-general agencies (BGAs) might have been four to six times their annualized EBITDA (earnings before interest, taxes, depreciation and amortization) today the multiple often rises to double-digits. 

“Valuations are at unprecedented levels,” said Ben Newman, Chief Financial Officerat Marsh & McLennan Agency LLC. “The dynamics of the private equity activity and inexpensive capital have created a buyer’s universe that’s never existed before.” 

Contributing to the rise in valuations are a growing number of top-flight brokerages that, because they can command a premium for their firms, are now looking to sell. Often factored into the decision is the fiduciary responsibility they have to investors to be “good stewards” of their firms’ assets, including share prices. 

“The last rise in multiples [price-to-earnings ratios paid for brokerages] has been driven by the quality of companies coming to market,” said John Wepler, chairman and CEO of MarshBerry and moderator of an SNL Summit panel on strategies for successful growth. “The increase in multiples has been quite astonishing.” 

In this feverish M&A environment, the challenge for buyers competing with other bidders, said Wormer, is to stay “disciplined.” That means not letting prevailing market valuations guide the buying decision at the expense of other factors that should be used to price a target firm. Among them: business fundamentals, strength of management, depth and breadth of the producer talent pool, plus the target brokerage’s alignment with the sales culture and strategic focus of the acquiring firm. 

Speakers at the SNL Summit uniformly emphasized this point, and one other: That their companies don’t budget for a specific number of acquisitions per year. Rather, the companies avail themselves of buying opportunities as they arise, judging each on the merits — and walking away from a deal when it doesn’t make sense. 

Different business models 

Also noteworthy are the varied ways in which the acquiring firms approach their targets. At some companies, the process is run in a top-down fashion; others take a decentralized approach. 

An example of the latter: HUB International. As its name implies, the company uses a “hub-and-spoke” model: 25 regional locations across the U.S. and Canada, each with its own chief financial officer, reports to a centralized headquarters. HQ does the due diligence and signs off on proposed deals, but the regional CFOs identify and advise on buying prospects. 

This decentralized model has yielded impressive results. Within the last year, HUB has closed on 40 acquisitions, the agreements collectively valued at $170 million. All of the pacts, said Wormer, were “tuck-in” or “bolt-on” acquisitions, meaning the sellers were purchased solely to merge them into a division of the acquirer. 

Boasting even more deals (many of them not publicly disclosed) is Acrisure LLC. In the last two-and-a-half years, the private equity-backed firm has inked 88 transaction; the company was on pace to close out 2015 with 54 acquisitions.  

The takeovers have boosted Acrisure’s revenue since 2013 to $440 million from $38 million, a 10-fold increase. EBITDA earnings have risen over the same period to $156 million from $10 million. And the brokerage’s footprint has expanded to 23 states from three. 

Why Acrisure’s reticence on the buyouts? CEO Gregory Williams cites a desire to minimize turmoil for the acquired companies during the transitional period. 

“We don’t want to disrupt the agencies we’re investing capital in or the relationships they have with insurance clients,” he says. “So we don’t talk about transactions in public.” 

Pursuing a more deliberate tempo is Marsh & McClennan Agency LLC. A unit of Marsh & McClennan Company, MMA inked six “partnership” agreements worth $150 million-plus in 2015, bringing the number of acquired companies since MMA’s formation in 2009 to 49. Because of the substantial financial resources of its parent company, MMA also generally opts to pay for brokerages entirely in cash.  
Other buyers represented at the SNL Summit, in contrast, rely on a combination of cash and stock to fund their acquisitions. The surging share price of many of the acquirers is a key attraction for BGAs thinking about selling. Case-in-point: Alliant Insurance Services, whose stock price has rocketed to 14.7 times its value of a decade ago.  

The rising share price, said Alliant’s Farr, has enabled the company to fund a growing percentage (typically a quarter) of buyouts in company stock; and to do more and larger deals without taxing the company’s bottom line. This past year, Alliant inked nine deals representing $140 million in acquired revenue. If cash is needed for a transaction, then Alliant (now a $900 million business) can tap the resources of its five private equity partners. 

Also enjoying a rising share price is HUB. In the 14 years since the company went public in 2001, the brokerage’s stock has grown to nearly $200 from $9 per share. The biggest increase occurred in 2013, when the stock jumped to $125 from $41 per share. 

Wormer noted, however, that HUB is not always in a position to pay as much in stock for a target company as the seller might want. The reason: the impact of a stock transaction on the other shareholders. 

“Every time we issue equity in a transaction, we’re not just diluting senior management’s two-thirds ownership of HUB,” said Wormer. “We’re also diluting ownership of the 649 other shareholders — our company’s employees. So a typical transaction will top out at 20 to 25 percent stock, the rest being paid in cash.” 

David Ross, vice president of acquisitions at BroadStreet Partners, says his company views stock as key to not only to finalizing a deal, but also rewarding and retaining acquired talent. But there’s a twist: BroadStreet, which expected to close on 28 deals by year-end 2015, generally doesn’t buy 100 percent of a target company, preferring to allow the seller’s top execs to retain a portion of the acquired firm’s shares as part of the transaction. 

“We want them to have skin in the game,” said Ross. “This is a pillar of our model, both for current and future management. Successor leaders at our core agencies retain stock, giving them [a vested stake].” 

Other factors are prompting prospective sellers to seek potential buyers. Some BGAs have reached a sales plateau or are facing mounting pressure from carriers to meet production targets. And they can’t grow further without the resources of a larger organization.  

Pre-retirement lifestyle issues often confront owners of other firms. They’re unwilling to make much-needed investments in their business at the expense of leisure activities and personal time with family. Still, other BGAs have failed to draft a succession plan and need to look to an outsider to keep the business operating and secure a retirement income in the bargain. 

For many sellers, such oversights depress the price they could get for their firm. Said Marsh & McLennan’s Newman: “We absolutely do not see consistency around investment in producers and succession planning at many of the agencies we’ve looked at.”(See sidebar) 

The best-in-class brokerage firms that “check all the boxes” — invest in their people, processes, and product — so as to sustain growth and minimize acquisition risk to the potential buyer are often well-worth paying a premium for, added Wormer.

These companies not only contribute to an acquiring firm’s M&A expansion plans; they may also prove pivotal to the acquirer’s organic growth objectives. Indeed, many of the market’s buyers are as much focused on the latter as they are on the former. 

This year, said Wormer, HUB is spending more than $15 million to boost its producer field force by 300, about half of which are recruits secured through acquisitions. The balance will be new hires from outside the industry. 

Also allocating bill dollars to enlarging its field force internally is The Hilb Group, a private equity-backed brokerage firm with $55 million in revenue and 10 acquisitions. 

“We’re investing a ton of money in new producers,” said Hilb Group Founder and President Robert Hilb. “We’re providing the resources — education, technology and mentoring — they need to grow their practices. One of the benefits of a firm of our scale is that we can create and offer these professional development tools. For many of the BGAs we’ve acquired, that’s very been appealing.” 

Outlook for 2016 & beyond 

As mergers and acquisitions in the brokerage arena continue apace, that appeal is likely to grow, if only because wholesalers that haven’t yet hooked up with a larger organization could find themselves at a disadvantage. Result: a hemorrhaging of insurance sales professionals to competitors that are able to offer superior product, education, tools, support services or compensation. 

Then again, the M&A activity could slow significantly — if not come to a halt. That could happen if interest rates ratchet up significantly, capital for buyouts dries up or private equity backers decide that they’re not getting an adequate return on their investments. 

This much is certain: M&A developments in the brokerage space will bear close watching in the year ahead. The industry’s stakeholders — not least among them independent producers — have a lot riding on the outcome. 

See also: 

M&A among insurers pegged at $200 billion-plus thru 3Q 2015 

Heading off a creeping crisis: exit planning for independent agents & advisors 

On the cutting edge at NAILBA 34: 4 case studies in innovation 

NAILBA’s David Long: broadening membership, advocacy & education 


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