Independent insurance agencies, though fewer in number, are growing, according to a recent U.S. survey by a leading agent/broker association.

Early results from a 2006 biennial survey show that "the smallest agencies are being acquired" at a nonstop pace, said Madelyn Flannagan, vp-education and research for the Independent Insurance Agents & Brokers of America Inc. in Alexandria, Va.

The online survey of 18,000 agent/ brokers, who are typically IIABA members writing property/casualty business, found that "one in seven agencies...has been involved in an acquisition/merger in the past two years, the same percentage as in 2004."

The survey had a response rate of about 17%.

Meanwhile, agencies with about $2.5 million in annual gross revenues are enjoying a viable middle market and some are exploring ways to "cluster" with peers to share back office-type operations, Ms. Flannagan said.

"The long-term trend toward fewer, larger agencies" continues as the estimated number of independent agencies decreased by about 1,500 to 37,500 in 2006 from 39,000 in 2004, the survey said. A decade earlier, there were 44,000 agencies.

"Average agency size continues to grow. In 2005, 22% of agencies had insurance revenue of $2.5 million or more, compared to 15% in 2003," the report said. Also, the proportion of agencies with insurance revenue of less than $150,000 has declined from 19% in 2003 to 12% in 2005," it said.

Acquisitions are much more common than mergers, accounting for 92% of the transactions.

Most mergers involve only two agencies, although the nine agencies with at least $25 million in insurance revenue that participated in the survey reported acquiring an average of 28 agencies each.

The primary reason that small agencies decided to cease operating separately was because agency principals were nearing retirement age, which was reported by 46% of respondents. Agreeing to an acquisition is being used "as a perpetuation plan," Ms. Flannagan said.

One impact of that is that retirements have lowered the average age of agency principals to the mid-30s to mid-50s, according to Patricia A. Borowski, senior vp with the Alexandria, Va.-based National Assn. of Professional Insurance Agents.

Other reasons why agency principals agreed to cease operating separately included being "too small to have sufficient leverage with carriers," cited by 44% of respondents, and that the agencies "couldn't get access to all needed products," cited by 34%.

The Washington-based Council of Insurance Agents & Brokers is interested in the IIABA's survey data, although CIAB members generally are larger, with at least $5 million in annual gross revenues, said Ken Crerar, CIAB president.

"I think we will continue to see accelerated M&A," Mr. Crerar said. "There is still an appetite out there."

For a deal to be successful, though, buyers need to perform appropriate due diligence to ensure that the entity they are purchasing is a good fit both financially and culturally, sources say.

There are two key reasons deals fail, Ms. Borowski said.

First, one agency acquires another agency, but lacks a business plan that shows how it will integrate and exploit that asset profitably within three years.

Second, agencies combine without understanding or addressing differences in each other's business cultures and tolerances.

"A simple problem has blown apart more mergers than I can count," Ms. Borowski said. That problem happens, for example, if one agency that issues overdue notices only after 60 days combines with an agency that sends out an overdue notice in 15 days and terminates coverage after 30 days. The principles have to address such issues in advance rather than relying on staff to resolve it for them, she said.