Although unlikely to match the number of mergers and acquisitions in 2012, experts expect another busy year of deal-making in the insurance brokerage sector.
The broad economic, market and demographic factors that have catalyzed deals in the past few years remain in place. And one additional impetus to deals in 2012, pending changes in the tax treatment of capital gains, will be less of a factor in 2013, said Timothy J. Cunningham, managing director of Chicago-based Optis Partners L.L.C., an investment banking and financial consulting firm serving insurance intermediaries.
“The last quarter of 2012 was really big,” he said. “Deal activity in 2013 will be down a little bit from 2012, but it will still be an active year.”
Dave Simmons, Hartford, Conn-based director at Deloitte Tax L.L.P. and the national leader of Deloitte's insurance mergers and acquisitions services, said there will continue to be strong activity in the broker M&A space, but the average size of the deals will be smaller.
“When you look over the past five or six years, there's been so much activity that a lot of the larger regional broker firms have been bought up,” Mr. Simmons said. “So that consolidation means that acquisition activity will go down a level to the smaller regional brokers.”
Thomas Doran, Atlanta-based principal at Reagan Consulting Inc., said the fragmented, bottom-heavy nature of the brokerage industry ensures more deals. “The universe of small agencies creates an opportunity for aggregators,” he said.
Mr. Doran said the influx of new, acquisition-minded brokerages with financial backing of private equity firms will spur deal-making.
“Brokerage is a cash-flow intensive industry,” he said. “It lends itself to the private business model, so there is no shortage of new brokerage firms trying to establish themselves.”
Mr. Cunningham agreed that private equity-backed brokerages are acquisitive by nature because investors are expecting their capital to be put to use.
“New entrants to the market have to make a mark,” he said. “They may have to pay a premium to make sellers take notice.”
Indicative of the trend of new brokerages that make acquisitive growth a core competency is Lake Mary, Fla.-based AssuredPartners Inc., which began acquiring brokerages in 2011 and was ranked the 15th largest broker of U.S. business in Business Insurance's 2012 rankings.
AssuredPartners Chairman and CEO Jim Henderson, who previously was vice chairman and chief operating officer of Daytona Beach, Fla.-based Brown & Brown Inc., said his firm focused on acquiring middle-market retail property/casualty brokerages and agencies that are seeking to monetize assets and gain access to capital. Mr. Henderson credited the company's decentralized operating model, which enables acquired agencies to retain local leadership while helping AssuredPartners rapidly gain a foothold in the market.
“We tend to do best with those that change the least,” he said, adding that positive word-of-mouth from acquired agencies also has helped surmount the challenge of being new to the marketplace.