Insurance broker merger and acquisition activity reached a record level in 2011, with most of the deals involving middle-market firms in surplus lines or employee benefits.
And while experts predict that deals involving wholesalers could continue in 2012 if the commercial property casualty insurance market hardens, they expect acquisitions of benefits brokers to taper in response to uncertainty over the effect of health care reform on commission income.
Acquisitions of insurance agents and brokers reached an all-time high in 2011, with 351 transactions occurring, compared with 243 in 2010, a more than 40% increase, according to Hartford, Conn.-based Conning Research & Consulting. The overall announced value of those transactions also rose to $2.6 billion in 2011 from $1.7 billion in 2010.
The only other year in which Conning's database showed more than 300 transactions was 2007. The previous high transaction value also was in 2007 at $15.2 billion, driven by some significantly large transactions. That year the following billion dollar-plus deals were announced: Wachovia Insurance Services, bought A.G. Edwards; Apax Partners & Morgan Stanley, acquired Hub International; Goldman Sachs acquired USI Holdings; Citigroup bought BISYS; and Blackstone Group acquired Alliant Insurance Services.
The two most prominent lines of insurance these acquisition targets placed were surplus lines and employee benefits brokers, according to Conning.
Meanwhile, bank-owned insurance merger and acquisition activity also was strong with 37 acquisitions in 2011 and appears to be continuing this year with Winston-Salem, N.C.-based BB&T Insurance Services Inc.'s February acquisition of Roseland, N.J.-based The Crump Group, industry sources say.
Chicago-based OPTIS Partners L.L.C., a financial and managing consulting firm serving the insurance distribution fcindustry, showed similarly high broker merger and activity statistics for 2011, counting 285 transactions, compared with 175 in 2010.
OPTIS also noted stepped-up activity involving private equity firms throughout 2011, recording a total of 77 acquisitions, 32 of which were completed by private equity-owned Hub International Ltd. of Chicago.
Among public brokers, Itasca, Ill.-based Arthur J. Gallagher & Co. was the most active buyer in 2011, acquiring 24 agencies, followed by Daytona Beach, Fla.-based Brown & Brown Inc., which made 17 acquisitions last year, and New York-based Marsh & McLennan Agency L.L.C., a division of Marsh Inc., which acquired 10 brokers last year.
While some brokers' recent divestitures have been due to aging agency owners' desire to retire, buyers often have been reluctant to let the former business owners leave (see related story).
While the volume of mergers and acquisitions in 2011 was unprecedented, the types of mergers were in keeping with historic patterns, said Timothy J. Cunningham, managing director of OPTIS Partners.
Historically, the trend of merger and acquisition activity in insurance has been among middle-market brokers buying or consolidating with other middle-market or smaller brokers in order to grow, Mr. Cunningham said.
Jerry Theodoreau, vp and author of Conning's “Global Insurance Mergers & Acquisitions in 2011,” said “activity is following the overall economic and insurance market. If you look at the environment in 2011, there was more optimism of both a push in organic growth—the GDP (gross domestic product) was forecast to grow 3.5%—and people were thinking the cycle was bottoming out and you'd have a firming of rates.
“Having both organic growth and rate growth, it was a double boost for brokers,” making it “a hot sector,” he said.
Mr. Theodoreau also saw acquisitions of wholesale operations through acquisitions of managing general agents and program administrators, perhaps in anticipation of an imminent market turn.
“It's a higher-margin business; there is some profit-sharing, higher commissions. And some of the buyers were not just brokers, but insurers buying brokers to achieve vertical integration,” he said.
Meanwhile, John Wicher, principal of Wicher & Associates in San Francisco, said “private equity is a meaningful and growing factor behind what has become a mini surge in mid-market transactions. Smart money still believes there is money to be made in mid-market brokerage.”
Health care reform was a driving force behind the surge in benefits broker deals during 2011, industry experts agreed.
Benefits brokers “are being forced to deliver more value-added service, and you need scale to do that,” Mr. Cunningham said. “The smaller employer-size books of business don't have a lot of value because of concerns about health care reform,” he said. In particular, brokers serving employer groups with 50 or fewer lives could face competition from state insurance exchanges after 2014, he said.
“But some buyers think they can aggregate enough to get scale” and are actually looking to acquire brokers with large books of 50 to 100 life accounts, he said. But “the revenue associated with those are being discounted by buyers significantly,” Mr. Cunningham said.
Due to the health care reform law, “there seems to be a lot of interest among sellers,” said James Blaney, Philadelphia-based CEO of Willis North America Inc.'s human capital practice. “The locals and regionals are facing the potential of being disintermediated by carriers,” he said, because “the carriers want to do more business with fewer brokers to consolidate their distribution chain.”
At the same time, “the locals and regionals are looking to monetize their business and provide their clients with more resources” that they may not have the wherewithal to provide, Mr. Blaney said. “In the post-health-care-reform economy, that has the cards stacked against you.”
Briarcliff Manor, N.Y.-based USI Holdings Corp., which made eight acquisitions in 2011, also is looking to acquire boutique benefits operations that serve the lower middle market, defined as employers with 100 to 2,000 covered lives, said Mike Turpin, executive vp of subsidiary USI Insurance Services L.L.C. “Seventy percent of brokers that represent middle-market employers have books of business less than $5 million. They can't possibly afford the resources necessary to address the changes coming from (the Patient Protection and Affordable Care Act) and other regulations.”
However, Samiye Yildirim, a partner specializing in financial services merger and acquisition activity at PricewaterhouseCoopers L.L.P. in New York, predicts that dealmakers will become more cautious before buying too many more benefits brokers this year, until there is more certainty around their future income potential.
“How do you acquire a business when you don't know what the future revenues are going to be? With elections coming up, I don't think anyone has been able to guess where we may end up,” Ms. Yildirim said.
“The transactional brokers in the small-group market are going to have a hard time of it. With the (medical-loss ratios), there's a disincentive for insurers to pay strong commissions,” Mr. Wicher said, referring to a provision in the reform law requiring insurers to allocate 80% of premiums collected in the individual and small-group markets and 85% of premiums in the large-group market to paying medical expenses. In response, many health insurers have reduced broker commissions.
But “buyers are interested in sellers who have established consultative relationships with their clients. There are significant opportunities in fee-based, employee-benefits consulting, 401(k) administration, executive benefits, the list goes on,” Mr. Wicher said.