The North America insurance merger and acquisition (M&A) market is on fire. According to PwC, the value of M&A activity in the US insurance sector soared to US$40.3 billion (about CA$53.7 billion) in 2018, more than double the US$19.5 billion (about CA$26 billion) total in 2017.
Brokerage and agency acquisitions led the way in terms of deal volume in 2018, with the majority of activity coming from several serial acquirers buying up regional brokers. M&A advisory firm OPTIS Partners recently reported there were 626 announced brokerage M&A deals in the US and Canada in 2018, and many more un-announced transactions. Both PwC and OPTIS have reported that private equity and hybrid buyers accounted for the majority of 2018 brokerage transactions, with the top buyers being Acrisure, AssuredPartners, Arthur J. Gallagher & Co., Alera Group, NFP Corp, Broadstreet Partners and Hub International.
So, why are insurance brokerages so attractive to acquirers right now? For one, it gives firms the chance to scale up their national footprint. Independent brokerages tend to have strong local footholds with loyal clientele. Acquirers have started to realize that these local relationships are vital as they look to buy and build, explained Greg Peterson, partner, US financial services deals leader, PwC.
The active M&A environment in North America is both a challenge and an opportunity for independent brokerages. By partnering with larger strategic corporates, smaller brokers can gain access to broader distribution channels and product offerings. On the other hand, the challenges tend to come in the shape of complex deal structures, misaligned cultures and integration.
“These deals can be structured in a lot of different ways,” said Gregory McGahan, partner, US asset and wealth management deals leader, PwC. “Acquirers can either do an outright acquisition or they can do a contract deal where they lock the brokerage up for a number of years (the longer the better). The question is, what happens at the end of that contractual period? If the brokerage does a fantastic job and generates a lot of value during the five-year contract, what happens with the value that’s created? Does the acquirer have to renegotiate and pay a higher price to renew that contract? Also, if acquirers opt for the contract method, they run the risk of a competitor stepping in, bringing a different suite of products to the table, and enticing the broker to move their business in another direction.”
Cultural challenges are often the major roadblocks to any brokerage acquisition, according to McGahan. It can be tough for self-made or family business owners to suddenly bend the knee to corporate dictators. In the context of heightened consolidation, the best thing brokers can do is be prepared for all eventualities and have a clear notion of their business value and culture.
“Oftentimes, when an acquirer comes knocking an interviewee is just not ready,” said Peterson. “Potential sellers need to be prepared for the knock on the door regardless of who it comes from. They need to do that preparation and due diligence before they put themselves into play. If there are things they need to fix, address, or explain, they need to do that. Anything that’s discovered in the due diligence process actually creates value and leaks that across the table from the seller to the buyer.”
Simply put, any brokers who are considering selling into the wider consolidation trend need to carry out regular dress rehearsals, because the best sellers are the brokers that are prepared for the sale, according to McGahan.
“You’re either the hunter or the hunted – and you can be strategic in both cases,” he told Insurance Business. “Brokers can collect basic things like a set of financial statements, analysis of their customer base and the retention of those customers, and analysis of the profitability of their business. Having all of that financial information is critical because that’s what the deal starts with. Someone’s going to come in an do due diligence on the brokerage.
“Act as if you were going to buy your own business. What questions would you ask? Do you have the requisite information available so that you can tell the right story to the buyer? The last thing you want to do is get caught on your heels in the diligence process, because that’s the opportunity for the buyer to basically chip away at pricing and value. So, the best thing to do is spend some time preparing yourself for all eventualities.”