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Matthew Lerner

Deal activity expected to pick up in the commercial brokerage space in 2014

July 20, 2014 - 6:00am


Abundant seller-side supply coupled with equally plentiful capital on the buyers' side should make for an active consolidation environment in the commercial insurance brokerage space in 2014.

“I get calls every day — my phone never stops ringing,” Robert Morris, president of The Rampart Group Inc., said of the offers he gets to buy Lake Success, New York-based Rampart, which has 250 employees in four office locations.

“I'm getting calls from the large public insurance brokers as well as from the private equity shops that have given money to smaller brokers to go out and find acquisitions,” Mr. Morris said.

Though the callers see him as a seller, Mr. Morris said Rampart could just as well be a buyer, looking for acquisitions of firms that generate between $5 million and $20 million in annual revenue, he said.

There could be as many as 30,000 to 40,000 brokers and agents, from sole practitioners to large firms, in the U.S., providing ample sell-side inventory for any consolidation in the industry, said Julie Herman, associate director at rating agency Standard & Poor's Corp. in New York.

Increased interest and capital from private equity firms looking toward the brokerage space complements the sell-side, she said. “I think private equity and the capital that they bring in is increasing the trend toward consolidation.”

Combined with a low-interest-rate environment that provides easy access to credit, this abundance of buyers and sellers makes for a fertile merger and acquisition environment. “All the ingredients are there for a very active M&A year,” Ms. Herman said.

“The brokerage segment remains very fragmented, and it's ripe for continued roll-up activity,” said John Ward, CEO of Cincinnatus Partners L.L.C. in Loveland, Ohio.

“At the same time, there is a lot of private equity capital aggressively coming into the segment, so that's accelerating the rate of consolidation that a normally fragmented segment would generate on its own,” Mr. Ward said.

“All the factors are pointing toward more consolidation and more M&A activity,” said Mr. Ward.

Mike Sicard, chairman, president and CEO of USI Insurance Services L.L.C., Valhalla, New York, also sees inventory as a driver of consolidation.

“There are over 38,000 brokers and agents across the United States, and each year typically 200 to 300 will trade, so the market is large and highly fragmented,” he said. “As a result, there are continuous opportunities for USI and other brokers to find great acquisition partnerships annually.”

USI in May closed on its acquisition of 42 Wells Fargo Insurance Services USA Inc. offices across the U.S., and the company expects to be a part of 2014's active consolidation environment, Mr. Sicard said.

“The second half of 2013 and so far 2014 have appeared to resume a continuing robust period of acquisition that we would expect to continue for the year. USI has been and will continue to be one of the most active acquirers in the industry,” he said.

Similar sentiments came from Brown & Brown Inc. and Arthur J. Gallagher & Co., two leading commercial brokerages.

“I would agree that 2014 has been an active year so far,” said Daytona Beach, Florida-based Vaughn Stoll, director of acquisitions for Brown & Brown.

“We will continue to see a lot of buyer interest. As long as interest rates stay low, I think you will continue to see that buyer demand stay high,” Mr. Stoll said.

Activity may even increase, he said. “When you get to the latter part of the year, I think you often see the fourth quarter as a pretty busy time,” due to tax planning and other concerns, he said.

“2014 has been an active year for consolidation, and we expect that to continue,” said J. Patrick Gallagher, Jr., chairman, president and CEO, Arthur J. Gallagher & Co. “Acquisitions have long been a key component of our company's growth strategy. Our typical focus is on companies that generate between $1 million and $15 million in annual revenues, and our pipeline of those candidates is very strong.”

“The acquisition environment for the broker community is so vast because so much of the total business is very fragmented. There are so many small and regional brokers all around the country,” said Howard Mills, director and chief adviser of the insurance industry group at Deloitte L.L.P. and a former New York state insurance commissioner.

“I think that most people expect, and I would agree, that it will be an active year in the broker space for mergers and acquisitions,” Mr. Mills said.

“Organic growth is difficult to achieve, so one of the best ways for any broker looking to grow is by acquisition,” he said.

 



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