Insurance agency sellers are becoming more demanding about what happens after an acquisition, with principals increasingly looking beyond valuation multiples to ask whether a buyer can actually make their business stronger over the long term.
This is putting pressure on the traditional private equity (PE)-backed aggregation model, according to Brian Morgan (pictured), CEO of American Growth Insurance (AGI), who argues that simply combining agencies and centralizing functions such as finance, accounting and HR is becoming less compelling to sellers.
“I think the traditional PE playbook in our space has sort of run its course. It's got to be different,” Morgan told Insurance Business. “I think everybody in the industry would agree that it's sort of like, okay, you buy here, you sell there, you just aggregate a bunch of assets together, and then you package it up and sell it to the next buyer. That doesn't really work.”
Morgan’s comments come as consolidation continues to reshape US insurance distribution, leaving agency owners with an expanding field of potential buyers but also more questions about what a transaction will mean for their employees, clients and competitive position several years after closing.
Morgan said the economics of the traditional roll-up strategy have also changed as agency valuations have risen, reducing the opportunity for buyers to create value simply by acquiring smaller businesses and later selling a larger combined platform.
“If you look at where the multiples are for agencies right now versus if you just put them together and the arb on it, it doesn't meet the criteria of what most PE funds would look for,” he said.
At the same time, seller expectations have evolved. Morgan added: “Candidly, I think not only has the PE market moved, but I think the agencies' mentality has moved because they want more than just, ‘Take my finance, take my accounting, take my HR.’
“They're asking the question, ‘How are you going to make me a better firm? If we come together, what do we look like in five years? Are we going to be better off? What technology can you bring? What are you bringing from a sales training or recruitment standpoint?’ Because these agencies have a lot more needs.”
This reality creates a higher bar for acquirers seeking to differentiate themselves in a crowded M&A market. Beyond purchase price, sellers may increasingly assess the technology, recruitment capabilities, technical expertise, sales infrastructure and operating model they will gain through a transaction.
AGI is attempting to build its own model around that premise, combining insurance operators with backing from Rockbridge Growth Equity and venture capital firm Atomic. It completed its first acquisition this month, buying Baltimore-based Heller-Kowitz Insurance Advisors, which operates across personal lines, commercial lines, employee benefits and life insurance. It currently has almost 45 agencies at various stages of its acquisition pipeline, according to Morgan, with roughly 10% of those typically approaching a potential close at any given time.
Morgan said the company spent almost 12 months developing its operating model, technology stack, culture, geographical strategy and technical resources before beginning its acquisition push. The company is also being selective about which agencies it acquires, he said, particularly around willingness to adopt new technology.
AGI’s broader thesis is that technology can help independent agencies compete against increasingly large national brokerages without stripping away the relationship-based model on which many local firms were built.
But Morgan suggested the wider M&A lesson extends beyond technology itself. As agency principals weigh increasingly similar offers from well-capitalized buyers, the question of what an acquirer can contribute after the transaction may become a more important differentiator.
“It’s a combination of agencies wanting more, and I think the PE funds realize that if you put assets together now, they have to be cohesively put together,” Morgan said.
