BROKERAGES ARE being sold at historic rates in today’s insurance industry as hungry private equity firms drive up valuations, Baby Boomers cash in and smaller agents seek to consolidate with national partners.
The average annual number of brokerages purchased in the past two years was 65% higher than the annual average of sales over the previous eight years. In 2015 and 2016, there were 492 and 457 deals, respectively, which stands in striking contrast to the 287-deal annual average for the years between 2007 and 2014. And activity this year looks set to continue that trend.
“Deal activity is at an all-time high,” says Kevin Stipe, president of Reagan Consulting, which provides strategic consulting, valuation and M&A services to independent insurance agencies. “And valuations right now are at an all-time high also. That’s generally because there are so many buyers trying to flood into the market.
The market in recent years has been dominated by private equity firms’ investment.
Last year, in fact, private equity companies completed 55% of all broker acquisitions.
“Private equity is doing half of the transactions – 10 years ago, they were doing 4% of the deals,” Stipe says. “So it’s a very hungry acquisition market.”
Nine out of the top 10 acquiring companies across 2015 and 2016 were private equity firms. Arthur J. Gallagher
– which came in at number five – was the only public company on the mega-buyers list. Its inclusion was no surprise, though, as the company prides itself on its acquisition model.
Bill Bohstedt, corporate vice president of mergers and acquisitions at Gallagher, is responsible for developing and managing the acquisition process for the company’s retail property & casualty brokerage operations in the United States. He says part of the company’s remit is to acquire viable brokerages. But private equity buyers, backed by big-time capital, are cutting in on Gallagher’s traditional merger turf.
Bohstedt leads a team of six “dedicated M&A sourcers” who work to find deals. “They are responsible for contacting all of the agents we have in our target database and finding new ones, and getting in front of them to have conversations about joining Gallagher,” he says.
The private equity firms snapping up brokerages are fueling “the frenzy, if you will, and driving valuations up,” Bohstedt says. “So Gallagher has to compete with that, and we do. We still get our fair share of acquisitions,
but others are getting them as well.”
Meanwhile, another piece of the puzzle in terms of higher sales activity is retiring Baby Boomers, Bohstedt says.
“Look at the demographics: The agency owner’s average age is probably 58 or 59 right now, and these agency owners have to think about what their perpetuation strategies are going to be. Many of them … are waking up and thinking, ‘Maybe I should sell.’ And now is the time to do it.”
An unexpected occurrence, perhaps, is that the number of brokerages isn’t really shrinking, Stipe says. Even in the face of unprecedented merger activity, the independent agency is not disappearing.
“There’s this kind of instinctive belief, when you look around at the system and the all-time-high consolidation over the last couple of years, that the independent agency is going to go away, that at some point it’s going to disappear off the face of the map, having been hunted to extinction by these buyers,” he says. “The reality, though, is that the system is regenerating itself very rapidly.
“As it turns out, over the last five years, there are over 3,000 new agencies that have been created,” Stipe adds. “That is more than the known number of acquisitions that have taken place. So you’ve got this system that looks like it’s shrinking because of all the [buyer] activity, and yet agencies are regenerating very quickly and basically
filling the pipeline back up. So it’s a very interesting time.”
But beyond the acquisition statistics, there is a personal cost for a lot of owners who are selling their agencies. Getting the best for their company and staff – and the biggest bang for their buck in the high-value market – is obviously appealing, but many owners have built their businesses from the ground up. The thought of giving up their autonomy carries a real emotional burden, Stipe says.
“It’s a lifetime decision for a lot of these guys, and they so value their independence,” he says. “The core of who they are is an independent agent. And when they consider selling, that is one of the most tumultuous,
emotional decisions of their lives.”