A mergers and acquisitions advisory firm focusing on the insurance agency sector says it is hearing more this year about “a lack of quality acquisition opportunities,” which could lead to fewer deals this year compared to 2012.
MidCap Advisors, a New York-based M&A firm with a focus on small- and mid-sized brokerages and agencies, told Insurance Journal that 2013 would still be a very active market for mergers and acquisitions.
“Even though there are economic uncertainties and the low interest rate environment, we do believe that the consolidation that’s been taking place over a good number of years will continue,” MidCap Advisors’ Partner John Poppe said.
There were 291 announced agency M&A transactions in the United States and Canada in 2012, the largest number since 2000, according to a recent survey by M&A firm OPTIS Partners. Last year, sellers were especially interested in getting their deals done before year end 2012 to avoid the impending higher capital gains tax rate of 20 percent (versus 15 percent) and the new capital gains surtax for certain taxpayers of 3.8 percent as mandated by the Patient Protection and Affordable Care Act, according to OPTIS Partners. (The survey results included retail and wholesale agencies and brokerages, and MGAs/MGUs offering property/casualty, employee benefits and life/financial services.)
“The need to get larger and to grow the top line will be one of the main focal points of the M&A activities this year,” Poppe said.
But compared to 2012, what may occur in 2013 is that “you might see fewer deals get announced,” said MidCap Advisors’ Vice President Frank Robertson. “I think you might see deal prices go up from where they were in 2012.”
He said that when he talks with M&A departments of the top-tier insurance brokers, “they say they are seeing a lack of quality acquisition opportunities in the market.”
“But when they do find the good opportunities, they’re willing to pay up for them. I think you’ll see maybe a fewer number of deals, but multiples on the rise,” Robertson said.
Deal Prices May Go Up in 2013
“I think valuations for well-positioned, well-run firms are very strong right now…People are hungry for growth,” MidCap Advisors’ Poppe said.
The executives at MidCap Advisors also commented that the pressure that’s put on insurers to improve efficiency — including in their distribution channels — continues to play a role in M&A activities.
The pressure on insurance carriers is requiring them to look at operating efficiencies and to drive out costs in their system, including their distribution channels, Poppe said. “As a result, they’re making major investments in technology and also scrutinizing, really, all the parties involved with the distribution channels that the insurance companies are using,” he said.
“The true providers — whether it be a managing general agent or a broker that’s providing added value both to the carrier and to the consumer — will do well in this environment, as far as there will be increased scrutiny by the carriers to make sure that the intermediaries are providing value.”
Poppe said he is expecting this pressure to continue to be one of the catalysts for M&A deals. Firms that either can’t afford or are unable to invest in technology — to either provide customer portals or quick quoting to issuance rates or streamline their internal processes — will find it difficult to compete and will probably end up being good acquisition candidates for those that are making those type of investments, he said.
Commenting on the major acquirers, Robertson said “the buyers are the usual suspects.”
“You have the top-tier insurance brokers, the Brown & Browns, Gallaghers, Willises, USIs of the world,” he said. And in addition to that group, “you’re working with the financial buyers. I see a resurgence of bank interest in the insurance agency model.”
“In fact, we actually had a bank recently look at a wholesale company we were in the market with. That was a new experience for me.”
Buyers Seek Good Organic Growth, Established Sales Culture
The executives also listed qualities that potential buyers look for in acquisition candidates — starting with good organic growth.
“They like agencies that have competent managers. But most importantly, they like agencies that have an established sales culture,” Robertson said. “They use it to compensate their producers, incentivize them to go out and continue to go out and continue to bring in new business, as opposed to sit on their existing books.”
“Those are the agencies that get the most attention. I’m assuming that they have the proper mix of business — a good mix of personal and commercial, usually, is what the buyers like to have,” Robertson said.
Additionally, cultural fit is also seen as one of the most important considerations in M&A transactions, according to MidCap Advisors.
Emphasis on Cultural Fit
Cultural fit is “probably one of the first things that they look at to determine, is this a transaction that has a high probability of closing?” Poppe said.
Most transactions will have an ongoing performance evaluation component to a deal structure, and cultural fit will be an important part of maximizing the value for the seller and also the synergies that are realized by the buyer, according to the MidCap executives.
“Buyers, at least from what I see, are really scrutinizing transactions. While there’s plenty of cash and the financing markets are strengthening, that does not mean that buyers are just willing to throw money at any transaction that they see,” Poppe said.
“It really needs to fit strategically for their plan. Cultural fit is important, as are the established sales culture, good organic growth and relatively low customer churn, or — to put it another way — high customer retention levels,” Poppe said, adding that buyers also look at whether the agency or the wholesaler is in a segment that is growing faster than the overall economy.
On the other hand, buyers appear to be growing less interested in some of the agencies that specialize in employee benefits. Specifically, Robertson said employee benefit agencies with a specific focus on insuring groups of less than 50 have seen their valuations come down, “and I see buyers staying away from that.”
But even among potentially good acquisition candidates, firms that successfully complete the transaction are those that are ready, the executives said.
“The question is, what types of firms are getting bought? The firms that are getting bought are firms that pretty much are ready to be transacted — meaning that their information is prepared, is well laid out, and allows an active acquirer to go in with their team and to evaluate the opportunity and to make a decision pretty quickly if this is a type of company they would like to acquire or not,” Poppe said.
When the firms are not prepared, the deal execution team for a buyer may determine that it’s just going to be too time-consuming to look to execute on the transaction. “We do think that this is a pretty good time to look at a transaction. But again, I want to emphasize, the importance of being ready for a transaction is, in my opinion, critical. Time is what usually kills transactions,” Poppe said.
And for agency owners looking to potentially sell their business, they should make sure that all of their stakeholders’ interests are aligned, the executives advised.
“If you’re in a situation where you’re the majority shareholder and you have minority shareholders, make sure that everyone’s interests are aligned in wanting to push a deal across a goal line prior to entering into conversations with buyers. Make sure that your own house is in shape prior to trying to execute a deal,” Robertson said.
“We’re very excited about the insurance space this year,” Robertson said. “We think there are a lot of great owners out there. We like the people that the insurance sales industry attracts. We also see an aging ownership core out there that could lead to a lot of activity in the insurance M&A space.”