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Brokerage buying spree made 2014 a record year for mergers and acquisitions

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Private equity-backed buyers expanded their ownership of insurance brokerages in 2014, contributing to a record number of announced mergers and acquisitions in the United States and Canada amid strong pricing for sellers.

The 357 deals in 2014, 11.2% more than the previous record of 321 M&As in 2012, do not include international acquisitions completed by some of the major U.S. brokers amid companies' ongoing expansion overseas.

A mad rush to get deals done to avoid a five percentage point increase in the capital gains tax, which rose to 20% on Jan. 1, 2013, propelled 2012 activity. After M&As slowed as expected in early 2013, the pace has been brisk ever since.

Arthur J. Gallagher & Co. and Hub International Ltd. tied for the largest number of announced deals in 2014, followed by AssuredPartners Inc., Acrisure L.L.C. and BroadStreet Partners Inc.

Eight of the 10 most active acquirers completed 10 or

more deals during the year; 106 completed only one or two transactions. In all, 128 companies made acquisitions in 2014 vs. 114 in 2013 and 131 in 2012.

Led by Hub, AssuredPartners and Acrisure, six private-equity buyers completed more than 10 deals. The private equity-based acquirers closed 44% of deals last year, up from 34% in 2012 and 21% in 2008. Since 2012, 14 of the top 25 acquirers have been brokers backed by private equity funds, furthering their dominant position in the marketplace.

The only buyer category showing less activity in 2014 was the bank-owned group, where only 13 announced deals marked the lowest number since 2008.

The other categories — publicly traded, privately owned and all other types of buyers — registered increases compared with 2013.

Privately owned brokers set a record in 2014 with 113 announced transactions by 75 separate acquirers, only two short of the 2012 high mark of 77. Digital Insurance Inc. led the privately held group with seven deals.

Deals closed by public brokers increased from 34 in 2013 to 56 in 2014, a 64% increase but off the 2012 high of 72.

Gallagher led the pack among publicly held brokers followed by Marsh & McLennan Agency L.L.C. and Brown & Brown Inc. Over the past seven years, Gallagher and Marsh & McLennan Agency significantly increased their share of the publicly held broker deals, while Brown & Brown had the largest decline in its number and share of deals.

Stand-alone property/casualty brokers continue to be the most sought-after sellers, representing 40% to 45% of total annual transactions. Benefits-only brokers and brokers offering property/casualty and benefits account for another 20% to 25%, with the balance of the deals generally made up of managing general agents, wholesalers and miscellaneous distribution channels.

Despite the U.S. health care reform law, the percentage of benefits-only or property/ casualty/benefit agencies being sold has not changed to any significant degree in recent years.

Among the largest purchases made in 2014 were Marsh & McLennan Agency's purchase of San Diego-based Barney & Barney L.L.C. and Greensboro, North Carolina-based Senn Dunn Insurance. In addition, Gallagher acquired Toronto-based Noraxis Corp.

Looking ahead, the economy has been trending favorable, premiums remain relatively stable albeit with some recent apparent softness, and the near-term outlook is generally for more of the same.

There is very strong demand on the buy-side from the private equity-backed and publicly held brokers to attract high-quality sellers. Given the current finite inventory, seller's market pricing prevails with multiples at historically high levels.

That said, the natural marketplace forces eventually will shift buyer and seller behavior. Until we reach that point of equilibrium, barring unforeseen economic and/or insurance calamities, we would anticipate this active M&A market to continue. A large number of aging agency principals need to capitalize their value, but only a few are adequately prepared for any type of internal succession.

Timothy J. Cunningham and Daniel P. Menzer are principals at Optis Partners L.L.C., a Chicago-based investment banking and financial consulting firm that serves the insurance distribution sector. Mr. Cunningham can be reached at 312-235-0081 or cunningham@optisins.com and Mr. Menzer can be reached at 630-520-0490 or menzer@optisins.com.