Brokerage Watch

Brokerage Watch is a new bimonthly Insurance Journal department written by Charlotte, N.C.-based LMC Capital LLC (www.LMCCapital.com), a national investment banking firm focusing exclusively on the insurance industry. Services include industry-specific advisory relating to mergers and acquisitions, capital raises and valuations. The next Brokerage Watch will appear Oct. 17.

Stock Prices:
The two month period of June and July brought joy to some shareholders and little promise of better times ahead for others. The market value and share price of Marsh & McLennan and, to a lesser degree, Willis, continue to suffer most from the “Spitzer Effect.” In spite of Brown & Brown’s record second quarter results, which apparently did not live up to market expectations, the company’s shares dropped nearly 4 percent between the announcement and the end of July. Gallagher’s shares had declined a little prior to announcing second quarter results but jumped nearly 5 percent after reporting, closing up 2 percent during the period. The market’s continued confidence in Hub and USI Holdings is clearly reflected in steady, strong share price increases during June and July.

Valuation Multiples:
At the end of May, the median price to trailing EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiple was 9.67. It dropped by 3 percent to 9.36 by the end of July. P/E ratios using 2005 earnings estimates also fell by 3 percent from 15.15 at the end of May to 14.70 at the end of July. For several months, Brown & Brown has been well ahead of all competition when comparing valuation multiples of share price to trailing revenues (July: 4.38) and share price to consensus 2005 EPS estimates (July: 20.24).

M&A Activity:
Year to date, 84 acquisitions of predominantly P/C insurance brokers have been announced publicly. January alone brought 28 announcements. Activity during the subsequent months has dropped to more normal levels of six to 12 acquisitions per month. There were 18 deals involving acquisitions of insurance brokers during June and July. As usual, the large public brokers led the way announcing nine acquisitions during the two-month period. Banks followed with six acquisitions, small to mid-size brokers gained two deals and an insurance company announced one brokerage acquisition. The largest deal was announced by Lockport, N.Y.-based First Niagara Financial Group Inc., which acquired Rochester, N.Y.-based Hatch Leonard Naples Inc., a commercial insurance agency with revenues exceeding $17 million in 2004. Although, the “Spitzer Effect” may have had some influence on the selling prices, the sustained M&A activity in the sector confirms it has had little effect on discouraging growth by acquisition to overcome increasingly stagnant organic growth rates.

Raising Capital:
Announcements of capital raises are infrequent in the brokerage sector. Only one announcement per month is typical. Of special note during June and July was Willis’ $600 million raise which was the largest by an insurance broker since last December when Marsh & McLennan announced a $3 billion loan which included a revolving credit facility. A Willis press release indicated the money will be used “toward the repayment of the term loan facility under its senior credit facility and for general corporate purposes including acquisitions and funding requirements under its employee pension plans.” The company clearly has intentions to press forward with acquisition initiatives.

Topics Agencies