Help

BI’s Article search uses Boolean search capabilities. If you are not familiar with these principles, here are some quick tips.

To search specifically for more than one word, put the search term in quotation marks. For example, “workers compensation”. This will limit your search to that combination of words.

To search for a combination of terms, use quotations and the & symbol. For example, “hurricane” & “loss”.

Login Register Subscribe

Mergers and acquisitions activity slows after setting records in 2012

Reprints
Mergers and acquisitions activity slows after setting records in 2012

Announced mergers and acquisitions of insurance agents and brokers in the United States and Canada finished 2012 with the largest number of deals in one month and for one quarter since before 2008.

The number of announced deals early this year continued last year's trend, and likely were deals that closed in December but were not announced until this year.

Since February, however, every month has had only modest deal activity. Given the record-setting 2012, the falloff in mergers and acquisitions this year should not be a surprise.

With the capital gains tax increasing from 15% to 20% effective January 1 and a new Patient Protection and Affordable Care Act surtax of 3.8% on investment gains for certain high-income individuals, the robust pipeline was drained as principals considering selling were strongly motivated to get it done last year.

The most active buyer groups this year continue to be privately owned brokers and private equity-backed firms. They were responsible for nearly 70% of the announced transactions in the first half of this year, up from 60% for the same period last year. Publicly traded brokers dropped to only 15% in the first half of this year from 23% of the total in the first half of 2012, with nearly half of their announced deals in January. Thirty-seven different privately owned buyers announced deals during the first half of 2013, while there were 13 different private equity buyers during the period.

Private brokers and bank-owned agencies were the only groups that increased their reported acquisitions through June of this year compared with the same period last year. Private equity buyers were steady, with 40 announced first-half deals in 2011, 2012 and 2013. Despite the late reporting of 2012 deals, publicly held brokers and the all-other-buyer groups dropped substantially in the first half of this year.

%%BREAK%%

Property/casualty brokers continue to be the primary product-line focus of acquired brokers, followed by benefit brokers and combined property/casualty/benefits brokers. The interesting statistic, however, is the continued popularity of benefits-focused brokers. It appears both sellers and buyers will continue to be motivated by the implications and uncertainty of PPACA. Sellers need the value-added and other resources offered by larger firms to help clients navigate the health care reform law. Buyers need to aggregate volume to spread the cost of the value-added services they have built over a larger client base.

Among private equity-backed firms, there were two major recapitalizations in the first half of this year. Due to the core nature of these deals, they are not treated as traditional acquisitions for this data:

• Genstar Capital acquired GCP Capital Partners L.L.C.'s equity in Acrisure L.L.C. in March.

• Kohlberg & Co. L.L.C. replaced Berkley Capital's investment in Risk Strategies Co. in June.

On a more traditional level, two noteworthy transactions closed in the first half of this year:

• Private equity firm Madison Dearborn Partners L.L.C. announced the acquisition of National Financial Partners Corp. in April.

• Brown & Brown Inc. in May announced the acquisition of Beecher Carlson Holdings Inc. from Austin Ventures, FSPM and a group of individual equity holders.

Private equity-backed brokers, whether well-established (such as Assured Partners Inc., Hub International Ltd. and USI Holdings Corp.) or those recently entering the insurance arena, may provide much of the capital and demand for opportunities to keep broker valuations relatively stable. As recently reported by several sources, global private equity firms raised more capital during the second quarter of 2013 than any quarter since the fourth quarter of 2008, which would seem to support the continued expansion of private equity into the insurance distribution arena in the near term.

%%BREAK%%

Private equity-backed ventures may be the most active buyer group in the foreseeable future as the number of participants continues to increase and continues to attract funding.

The active publicly traded brokers, Arthur J. Gallagher & Co. and Brown & Brown, have consistently been the most active buyers over the past five years. Brown & Brown closed the acquisition of Beecher Carlson in July, and Gallagher reportedly is close to acquiring a top 25-size firm. This could diminish their deal activity somewhat as they close and integrate these larger acquisitions.

Bank-owned agencies still have not recovered to their pre-recession activity levels, with limited exceptions. There are two banks that have had robust activity this year, led by Peoples Bancorp Inc. (four transactions this year, but none previously) and Canada-based Western Financial Group Inc. (four acquisitions this year). Wells Fargo Insurance Services USA Inc. has completed 24 deals since 2008, but only one since the start of 2012. Western Financial Group, now the second-most active bank in the broker acquisition space, has announced 18 agency acquisitions across Canada since 2008, half since January 2012. BB&T Corp., the other historically active bank, has announced only one transaction since the end of 2011, and now sits with 16 deals in the past 5½ years.

Privately owned buyers are by far the largest potential group of acquirers, though they are a fragmented group. Since the start of 2008, only four privately owned firms have five or more announced acquisitions, and more than 300 firms have less than five.

The acquisition pipeline may not be restocked until 2014 and possibly into 2015, notwithstanding the need for the buyer-side group to drive growth by acquisition. Certain sellers may want to recover some lost value from the tax increases over the next few years. When all is said and done, however, the acquisition climate looks to be good for the foreseeable future for buyers and sellers alike.

Timothy J. Cunningham is managing director at Chicago-based Optis Partners L.L.C., an investment banking and financial consulting firm that serves the insurance distribution industry. He can be reached at cunningham@optisins.com. Daniel P. Menzer is a partner at Optis Partners. He can be reached at menzer@optisins.com.