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Brokers' 2014 mergers and acquisitions activity is highest since 2008

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U.S. and Canadian buyers and sellers announced 165 mergers and acquisitions of insurance agents and brokers in the first half of 2014, with a significant number involving private equity-backed firms.

The 165 deals have produced the most active first half since 2000 and the second-most active six-month period since the second half of 2008.

Although not included in our analysis, major U.S. brokers also made several significant international acquisitions during the first half. They include Arthur J. Gallagher & Co.’s acquisitions of Sydney-based conglomerate Wesfarmers Ltd. and London-based Oval Group of Cos.

2012 was the most active M&A year in the prior 10 years as sellers rushed to close deals to avoid higher capital gains tax rates starting in 2013. While the proverbial pipeline was nearly empty as 2013 began, the pace picked up at the end of the year and continued through June this year. The 93 announced first-quarter 2014 deals and 72 second-quarter transactions reflect a very healthy M&A climate.

Private equity-backed buyers have a pronounced, defining role in the overall M&A picture and have led the M&A count over all other categories since 2012. With 67 deals in the first half of 2014 and 70 in the second half of 2013, there have been more private equity-backed M&As in a 12-month period than any other buyer category since tracking began. The private equity sector likes the agent-broker space as it generates reasonably predictable cash flow, does not require large capital expenditures and has negligible balance-sheet risk.

Given the well-capitalized existing and new private equity-backed buyers, we are likely to see a sustained high level of agent and broker M&As from this group of buyers for several years.

Among other buyer categories:

• Publicly held brokers picked up their pace with 27 announced transactions through June, better than the first half of 2013 but short of the banner count of 30 in 2012.

• Privately held buyers also posted a strong first half with 54 deals, equaling the second half of 2012 and No. 2 only to the record 58 in the first half of 2008.

• Bank-owned and all other buyer activity continued to fall, with only 17 transactions in the first half of this year, the lowest since the same period in 2010.

Seventy-five buyers completed the 165 first-half deals. Five of the 16 active private equity-backed buyers completed five or more transactions; only three of the six active publicly traded brokers had more than three deals.

Thirty-five privately owned buyers completed the 54 first-half deals, and represent the largest group of potential buyers of agents and brokers. Privately held buyers are a disparate group, and many do not report their purchases, making any trends difficult to identify.

Based on announced deals since Jan. 1, 2011, six of the 10 most active buyers are private equity-backed firms led by Hub International Ltd. Behind Hub, the most active private-equity backed buyers were AssuredPartners Inc. and a newcomer to the most-active list, BroadStreet Partners Inc.

Among publicly held brokers, Gallagher led the pack; and among privately held brokers, Digital Insurance Inc. led the way.

Among noteworthy agent and broker deals that were announced or closed in the first half of 2014 were:

• Marsh & McLennan Agency L.L.C. bought San Diego-based Barney & Barney L.L.C. in February and Greensboro, North Carolina-based Senn Dunn Insurance in May.

• Gallagher in July closed a deal to acquire Toronto-based Noraxis Capital Corp.

With the lack of tax incentives or other motivating factors, M&As so far this year reflect a very optimistic view of the agent-broker space especially in addition to the continued inflow of private equity capital. Further, the conventional public and private buyers continue to acquire as organic growth remains a challenge.

Transaction values have continued their aggressive trends due in large part to competition, the quality of the sellers and the economics of the insurance marketplace. Absent a calamitous event or severe economic slip, buyers’ appetites will continue to drive stiff competition in agency valuations for top-shelf operations, and M&A activity in general likely will remain a key industry focal point.

Timothy J. Cunningham 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 industry. 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.