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Broker mergers keep rolling in during 2016 first half

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Private equity-backed buyers again dominated the insurance brokerage merger and acquisition landscape during the first half of 2016, but their share declined slightly amid increased activity by privately held and bank-owned brokers.

The 232 deals for the first half of the year in the United States and Canada are the second-most active six-month period since Optis Partners L.L.C. began tracking M&As in 2008, second only to the 233 deals in the first half of 2015.

Private equity-backed buyers led the pack with 114 M&As, nearly identical to the 115 in 2015. The 124 property/casualty-only agencies sold during the first half of 2016 were down from 136 in 2015, but they still were more than half of all deals.

For the first half, Caledonia, Michigan-based Acrisure L.L.C. led all others with 28 deals, up from 19 during the same period last year.

Chicago-based Hub International Ltd. completed 20 deals, followed by Lake Mary, Florida-based AssuredPartners Inc. with 17, Itasca, Illinois-based Arthur J. Gallagher & Co. with 16 and Columbus, Ohio-based BroadStreet Partners Inc. with 12. The other 92 buyers all reported fewer than 10 transactions, including 69 with just one acquisition apiece.

Acrisure reported the biggest increase in deals with nine more this year versus last year, followed by Risk Strategies Co. Inc. with four additional transactions.

NFP Corp., previously known as National Financial Partners Corp., had the largest decrease in the number of first-half deals, dropping from seven last year to two this year. Integro Ltd. followed with four fewer deals this year than the first half of last year.

Private equity-backed buyers accounted for 49.1% of all first-half 2016 deals, down from 53.4% of the 455 deals for all of 2015. Privately owned brokers' increased first-half dealmaking boosted the category's share to 29.3% of the total; bank-owned brokers boosted their share to 6.5% in their biggest showing since 2011. Publicly held brokers' share fell to 10.3% of the total.

Since the beginning of 2013, property/casualty brokers accounted for just less than half of all agencies sold. Benefits-only and combined P/C-benefits brokers each had 19% of all deals, leaving 12% for everything else, including wholesalers and managing general agents.

There have been 98 separate buyers thus far in 2016, down slightly from the 103 during the first six months of 2015. Fifty-seven privately owned buyers announced deals during the first half of the year, the highest of any six-month period. Fourteen banks also purchased brokers, the most since the first half of 2011. Only 14 private equity-backed firms announced acquisitions, down from 19 a year earlier.

Gallagher and Brown & Brown Inc. were the only publicly traded brokers in the top 10 for the first half of the year.

It's expected that these M&A trends will continue for some period into the future, barring significant market-changing financial, political or economic events. The United Kingdom's recent vote to leave the European Union remains an issue in Europe, but not for the U.S. distribution side. Soft insurance prices are being offset to some degree by growth in exposures and expanded coverage. Interest rates remain at historic lows, reducing the cost of borrowed funds used for acquisitions.

At the same time, M&A activity and pricing remain at historically high levels, but both are likely to come back down at some point in the future. Whether the transition in the number of deals is beginning or if 2016 first-half numbers were just an aberration is yet to be determined.

Agency owners pondering the best time to put the company in play should consider acting sooner than later. Relative to historical trends, now may be the time.

Buyers, on the other hand, should be cautious about trying to compete with the marketplace's high multiples; acquisitions' premium valuations can have significant adverse effects for an agency's long-term viability if the acquired entity doesn't perform up to expectations and the buyer lacks the capital base to absorb the shortfalls.

Timothy J. Cunningham (left) 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.