The private equity bandwagon continued to roll through the insurance agency and brokerage mergers and acquisitions territory in 2019. As many as two-thirds of all deals involved private equity, according to experts. Most of the busiest buyers are private equity backed.
While PE remains the major trend, there was also some nascent interest in acquisitions of digital and technology-oriented agencies or firms, along with investments in agency insurtechs, some of which could be the acquisitions of the future.
Ironically, the top Insurance Journal acquisition story of the year was about a deal that never happened. On March 5, 2019, a marriage between two of the largest insurance brokers seemed to be in the works. Giant Aon was considering proposing to rival insurance broker Willis Towers Watson in what would be the industry’s largest mergers ever.
A day later, Aon called off the courtship.
(The other major agency acquisition story had to do with the one that was announced in 2018 but closed in 2019: Marsh closing on its acquisition of JLT.)
While the huge Aon acquisition never happened, 2019 was at least as busy as 2018. Based on data from major advisories in the field including Optis Partners, Sica Fletcher and MarshBerry, as well as Insurance Journal’s own reporting, the total number of transactions appears to have been up slightly but not dramatically in 2019 over 2018.
Optis Partners counted 649 agency acquisitions in 2019, up from 643 in 2018.
MarshBerry projected after the third quarter that in 2019, the number of publicly announced insurance brokerage deals will exceed 600.
Sica Fletcher tracks an index of the 12 most active buyers; these 12 were involved in 449 deals or 8% more than 2018 and 73% of the 611 total deals in 2019. Sica Fletcher estimates the value of the agencies its index buyers bought at $2.3 billion.
“As you look at the numbers and they appear to be slowing down a little bit, just our gut tells us it’s not slowing down because of anything going on in the marketplace or anybody pulling back. It’s just there’s only so many deals these top active buyers can do,” Daniel Menzer of Optis Partners told Insurance Journal.
But back to Aon. Aon returned later in the year in November to pull off one of the more interesting deals: scooping up digital insurance agency CoverWallet, a platform for small and medium-sized businesses that launched in 2015 and raised $40 million during its run.
CoverWallet has partnerships with Chubb, CNA, Progressive, Starr, AIG, Zurich, The Hanover, Hiscox, Liberty Mutual and AmTrust, among others. Its digital competitors include Insureon and CoverHound in the small business market.
The acquisition provides Aon with additional access to what it sees as a fast-growing, $200 billion-plus premium global digital insurance market for small and medium-sized businesses. It also provides Aon with the opportunity to leverage CoverWallet’s platform to develop and scale other digital client experiences.
The Aon move was one of several hints that the digital space may be of burgeoning interest to agency acquirers, not to mention investors. These deals don’t necessarily show up in the totals because the buyers have not been among the most active. But combined, they may signal a trend.
Last January, Nationwide acquired E-Risk Services, a New Jersey privately held program manager specializing in management liability lines. Nationwide says E-Risk’s platform and products will enhance its own excess and surplus lines offerings for small and medium-sized business owners and help it grow in both management lines and the program business space.
In September, Prudential Financial said it would buy Silicon Valley online insurance startup Assurance IQ for $2.35 billion. Assurance uses machine learning to sell health, life, Medigap, home and auto policies from more than 20 providers.
In June, Hub International, in one of its close to 60 acquisitions for the year, acquired In-Fi, a high-tech distribution platform for high volume insurance placements and renewals for the financial industry. Hub also hired insurance agent and In-Fi co-founder Jon Chasteen and acquired his book of business.
In October, Arthur J. Gallagher acquired Florida-based The Doyle Group and its affiliates, collectively doing business as Direct To PolicyHolder (DTPH). DTPH is an e-commerce affinity platform focused on acquiring professional liability insurance policyholders in the allied healthcare and wellness fields.
While not involving agencies, there were a few transactions that reflected interest in agency-centered technologies.
In December, the insurance technology firm Applied Systems agreed to acquire digital insurance technology startup Indio Technologies. Applied Systems will now be able to offer Indio’s digitized commercial insurance application and renewal process to its 13,000 agency and brokerage customers and their business customers.
In June, personal lines specialty insurer National General Holdings Corp. said it would buy Syndeste, which has technology for selling flood insurance.
Insurance Technologies Corp., a marketing, comparative rating and management software firm, acquired Ohio-based Smart Harbor, which provides digital technology to insurance agents.
In November, digital home insurance managing general agency Hippo Insurance acquired an early-stage startup, Sheltr, that provides home wellness checkups. Also, real estate software maker MRI Software acquired Ohio-based Multifamily Insurance Partners, which provides resident insurance programs for the U.S. multifamily rental market.
These deals are separate from the record-setting investments being made, sometimes by carriers, in insurtech or technology-based startup agencies.
Buyers, Equity, Prices
While the digital space may be worth keeping an eye on going forward, the main action in the agency M&A space in 2019 remained, of course, with traditional agencies. (See sidebar of some of the year’s most noteworthy acquisitions.)
Industry reports reveal several trends: a handful of familiar buyers continue to lead the pack; private equity is driving the market; and prices being paid are higher than ever.
While their numbers vary slightly, Sica Fletcher and Optis Partners largely agree on the identities of the most active agency buyers in 2019: Acrisure; Hub International; AssuredPartners; Broadstreet Partners; Arthur J. Gallagher; The Hilb Group; Alera Group; Risk Strategies and Brown & Brown.
Optis also includes Patriot Growth, which burst onto the scene this year with 25 acquisitions, while Sica Fletcher includes its index members NFP, USI and Marsh McLennan.
In 2019, large pubic brokers, typically among the most active buyers, were about even with their 2018 tallies. Arthur J. Gallagher (Optis counts 33 in 2019 vs. 36 in 2018; Sica Fletcher has 50 vs. 42) and Brown & Brown (Optis says 20 in 2019 vs. 23 in 2018; Sica Fletcher says 23 both years) remained busy.
While the methodologies and numbers in industry reports vary somewhat, the cast of characters has been similar for several years, although each year one or two new players like Patriot Growth in 2019 or Risk Strategies in 2018 shows up and sticks around.
The dominance of private equity is clear in that all of the most active buyers — except Gallagher, Brown & Brown and Marsh McLennan — are fueled by private equity. (See sidebar on the private equity behind the buyers.)
Optis Partners found that private equity was involved in 69% of transactions in 2019, up from 67% in 2018.
Sica Fletcher writes in its report that PE-backed firms were behind 83% of the transactions by the 12 firms in its active buyer index in 2019, compared to 79% in 2018.
Agency Sale Prices
According to Optis Partners’ Menzer, the prices agencies are getting are “higher than they’ve ever been” thanks to what private equity firms will pay.
“Every quarter, every year, we say the same thing. It can’t stay where it is. We don’t know when, but at some point, it’s got to give,” Menzer said.
But the Optis partner does not see that changing soon given how the private equity model works. “They know, or they believe, that every three to five years they can trade up their capital, if you will, and sell the firm for, call it 12 to 14 EBITDA. All right? So with that in the background, they don’t mind paying eight or nine or 10 times EBITDA because they’re always getting that two, three or four EBITDA arbitrage.”
Meanwhile, privately owned buyers without PE behind them aren’t able or willing to match those prices.
“I think it does create a different type or level of competition for the local agency,” Menzer said.
Agency consultant Catherine Oak, of Oak & Associates, writing in Insurance Journal, notes that what private equity buyers are doing for their investors makes sense “because the return on investment is typically 20% to 30% plus, which is greater than most other available investments today.”
According to Oak, private equity firms are paying typically eight to nine times EBITDA (earnings before interest and depreciation) as down payments, plus there are usually earn-out bonuses. “When the value is translated to a multiple of revenue this means 2.75 to 3.5 times revenue. Sometimes the down payments require at least 10% to 25% of the acquirer’s stock and can also be required on at least one of the large buyer’s earn-outs,” she wrote.
These are very different from the offers made to those not selling to private equity. Oak writes: “Sellers today still get prices from other peer independents in the 1.5 to 2.0 times range, if there is at least close to a 25% to 30% profit margin. As a multiple of EBITDA (earnings before interest and depreciation) these values are in the 6 to 7 range. In the earn-out portion of the ‘price’ the seller is expected to grow the business, not just maintain it.”
According to information from MarshBerry’s proprietary database as reported in its recent publication, “Counterpoint: Think 2025,” valuations are up approximately 15% since 2016. For the 12 months ending Sept. 30, 2019, the average platform sold for 10.08 times EBITDA, with a potential for up to 13.13 times EBITDA if an earn-out was included. As a multiple of revenue, the average sale for the same last 12 months was for 3.09 times, with another .92 times where there was an earnout.
Marsh notes that in addition to private equity, long-term low interest rates have also helped keep prices high.
Oak agrees with Menzer that prices are unlikely to come down soon. “The current prices paid by publicly traded brokers, large regionals and agencies funded by private equity firms are already extremely high and will likely continue to be high for the valuable, desirable firms. Since the supply is dwindling, the prices may be even higher for those that remain if they fit the profiles of the key buyers today,” she wrote.
Sica Fletcher founders Michael Fletcher and Al Sica recently blogged on why and how even smaller agencies under $5 million might participate in private equity.
“Private equity sponsored brokerages are growth vehicles and as a result, they are not simply looking for businesses to acquire and integrate. Often, they are looking for partners who want to reposition their businesses to grow faster,” they advise.
Sizing Up Insurtech
With acquisitions continuing to be concentrated among a small universe of buyers, the consolidation means local independent agencies now have to compete with the larger agencies created.
“In many ways it’s all about size and scale. There’s just no way that that local independent agency, even if they’re 20, 30, 40 people, that they can offer the same depth and breadth of service that the larger firms can,” Menzer said.
Other agencies are not the only ones concerned about the size of the firms being created through M&As.
Agency consultant Chris Burand, in an April excerpt for Insurance Journal from his 2019 State of the P&C Insurance Industry Report, claims that property/casualty carriers are also worried about the behemoth brokers being built.
“Not all are scared, of course. Some are big enough, some are smart enough, and others are ignorant enough to not be scared about the future of insurance distribution. The ones that are scared are scared because of scale,” Burand wrote. Carriers are scared because some of the brokers are now bigger than they are.
According to Burand, based on 2017 10-k filings, Aon has almost $10 billion in revenue; Brown & Brown $1.9 billion; Willis $8.2 billion; Gallagher has $6.2 billion, and Marsh (before their huge acquisition of JLT) had $14 billion. Hub reported in 2018 that it had $2 billion in revenue.
Burand explains the ramifications:
“The 10th largest carrier on an NWP basis as of year-end 2017 is AIG with $14.2 billion. Marsh is larger now than 890 of 900 carriers. Of course, a large part of their revenue comes from outside the U.S. and I’m only citing U.S. carriers so this is not an apples-to-apples comparison, but the context provides an understanding of why carriers are so nervous.”
Carriers are reacting, according to Burand, by creating partnerships of their own and investing billions of dollars in insurtech independent insurance agencies.
“So their idea I think, I can’t speak for all of them, is to invest and partially own these new independent insurance agencies. It’s their counterweight to the consolidation that’s occurring. And if the consolidators, aggregators are too big, then they can maybe place more emphasis back on these insurtech insurance agencies they own,” he adds.
In related news, insurtech investments reached a high in 2019 and do not appear to be slowing. According to a briefing from Willis Towers Watson, total new global funding commitments to insurtech hit $6.37 billion for the year, with approximately $2 billion coming in for 75 projects during the 2019 fourth quarter alone. Distribution and MGA-focused insurtechs accounted for 57%.
As reported by Insurance Journal, the tech-enabled, high-end home insurance provider Openly began selling in Illinois and Arizona at the same time it announced a $7.65M seed round of funding led by Gradient Ventures, Google’s AI-focused venture fund. Openly’s investors include Hanover Insurance Group.
Digital property/casualty insurance platform CoverHound raised $58 million. Global specialist insurer Hiscox led the round, along with additional investors including Chubb.
Insurtech Zeguro launched its platform designed to help small and midsize companies manage cyber threats in multiple ways. Zeguro raised $5 million in seed financing last November from insurance industry investors including Munich Re (HSB Ventures/Hartford Steam Boiler) and QBE.
Insurtech Next Insurance pulled in a $250 million financing round from a single investor: Munich Re. Next has raised $381 million in three years since its launch, and the firm claims to have a valuation that surpasses $1 billion. In September, the MGA-turned-carrier launched Next for Agents, a portal to help independent agents quickly quote and sell its policies.
These investments come with risks, of course. Last year also capped a three-year period in which a number of startups have called it quits, noted Andrew Johnston, global head of InsurTech at Willis Re.
“While insurtech news is awash with the huge valuations and postulations of the art of the possible, there is also a very real story that is not so positive — individual insurtech cessations,” Johnston said in prepared remarks. “The number is very difficult to calculate, but our data indicates that during the past three years, approximately 184 funded insurtechs might have closed their doors.”
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