Expect competition in insurance agency M&A market in late 2015

by Caitlin Bronson10 Sep 2015
Agency principals hoping to sell their businesses during the second half of this year will face a multitude of potential buyers fueled by abundant capital, the growing diversity of acquirers and new national regulatory provisions.

Merger and acquisition activity among independent insurance agencies and brokerages reached near record-breaking levels last year, with M&A consultant MarshBerry reporting 320 publicly announced transactions for US-based targets.

That’s the second-highest year on record since MarshBerry began tracking annual M&A performance in 1999. Only 2012 outstripped last year in terms of the number of transactions with 325 deals, 77 of which were made in December and driven by the change in capital gains rates.

“What’s interesting about 2014 is that while only five deals off [from record-breaking 2012], it was much more of a consistently steady year. There was no external factor driving activity,” said Phil Trem, senior vice president on the mergers and acquisitions team at MarshBerry. “What is driving activity is pure demand.”

And with the growth in interested buyers and a sustained flow of private equity to acquiring firms, Trem believes there is “no reason to expect” the current sellers’ market won’t continue into 2015.

On the regulatory front, analysts believe the creation of the National Association of Registered Agents and Brokers (NARAB) may also ramp up merger and acquisition activity after the board is established and funded.

With a centralized, one-stop location for licensing in multiple states, larger agencies will likely start competing on a national basis and putting pressure on smaller “lifestyle” agencies, said Tim Owen, vice president of product management at Vertafore.

“The smaller, local agency will consequently see increased competition from new non-residents, with their different pricing and business models,” suggested Owen, who works with 23 state insurance departments to build producer licensing systems. “[The] increased competitive intensity could also drive up the level of agency mergers and acquisitions…to allow small and medium-sized agencies to compete more effectively.”

The level of competition and interested buyers doesn’t mean selling an agency will be a simple walk in the park this year, however. Trem, in fact, says agency owners are in a “tough spot right now.”

“The multiples we’re seeing in the marketplace are incredibly high,” said Trem, noting that the average firm received a 7.14 EBITDA multiple as base purchase price in 2014, up from 6.74 a year ago.

He noted that while analysts don’t expect multiples to continue rising significantly, it makes things difficult for independent agencies as their external worth is greater than their internal worth.

“The point is, we recommend that you consistently run your business with a reasonable profitability in the 20% range and are concurrently able to grow your top line,” Trem said.