Private Brokers More Active But Private Equity Still Leads in Agency Acquisitions

Well-capitalized private equity investors still have an advantage among buyers of insurance agencies, but privately-held brokers continue to be among the most active players in agency mergers and acquisitions, according to Reagan Consulting.

Also, while consolidation continues in the ranks of agencies, new agencies are being formed regularly, according to the consultants.

Speaking recently at the Agency Ownership Summit in Atlanta, cosponsored by Reagan Consulting and the Council of Insurance Agents & Brokers, Jim Campbell, partner at Reagan Consulting, addressed the increasing activity of private broker buyers in the M&A marketplace.

“Although private brokers would appear to be the underdogs in a marketplace driven by private equity, they have more than held their own,” said Campbell. “Private brokers have actually increased their acquisition activity, averaging more than 100 announced acquisitions per year since 2014 and on track to exceed that level in 2017.”

According to Campbell, private brokers accounted for 21 percent of all announced agency acquisitions last year, a higher percentage than public brokers and banks combined. Private equity completed 55 percent of announced transactions in 2016, according to Reagan.

“Private brokers trail only private equity as the most active buyers in the marketplace, and we expect them to remain a force,” Campbell said. “Although challenged to compete strictly on price, many private brokers have discovered they have competitive advantages such as an attractive culture and the ability to address the post-closing objectives of the seller.”

Strong M&A Activity

Summit attendees also heard that the outlook for insurance agency and brokerage mergers and acquisitions remains strong and shows no immediate signs of slowing.

Kevin Stipe, president of Reagan Consulting, pointed out that almost 1,000 agency mergers and acquisitions were completed in the past two years, and valuations are at historic highs. According to SNL Financial, from 2006 to 2017, the average annual number of M&A transactions was 317. In 2015, agencies saw 492 deals, 457 in 2016, and the pace of M&A so far suggests 2017 will be another strong year, Stipe said.

“With so many transactions occurring, it’s natural to wonder, is the independent agent being hunted to extinction? Available data on the number of agents and brokers indicates that is not the case,” Stipe said. Over the last five years, thousands of new agencies were formed, according to the Independent Insurance Agents & Brokers of America’s (IIABA) “FutureOne Study.”

Reagan Consulting’s analysis estimates that over the last five years, the agency regeneration rate is a little more than 1-to-1. “When we look at the agency universe today, we see a very healthy marketplace,” Stipe said.

According to the IIABA Study, in 2016 there were 38,000 independent agencies in the United States.

In addition, the number of large agency and brokerage firms is growing, while the number of smaller firms remains stable, Stipe said.

As an example, he cited Georgia, where he said about half of the state’s agencies producing $10 million or more in annual revenues didn’t exist 15 years ago. “Regeneration will continue to replenish the agency system despite consolidation,” he said.

The past 20 years have shown a dramatic evolution of the agency and brokerage business, according to Bobby Reagan, CEO of Reagan Consulting. “At our first M&A conference 20 years ago, the question was, ‘Who is buying and at what price?’ There have been many changes in the agency world since then. Productivity in terms of revenue per employee has more than doubled; profitability is up significantly; and the value of agents and brokers has increased markedly. Now, the focus is, ‘Who is prospering, and how are they doing that?'” he said.