by Bobby Reagan, May 2006

National Underwriter

At the end of 2005, consultants and industry commentators consistently projected that M&A activity within the insurance brokerage world in 2006 would remain consistent with the active pace that had been experienced in 2005.  Most felt that the level of activity would be stimulated by public companies' need to off-set low organic growth and financial institutions' desire to build insurance platforms and to get them to a sufficient critical mass to make their efforts worth while.  Based on what we were seeing at the end of 2005, this was not an unrealistic projection.

As we approach the middle of 2006, however, we see far less activity than had been projected.  Buyers are reporting a lower inventory of quality candidates.  Fewer larger agencies are talking about selling.  We had the privilege of representing Citizens Financial Group in their sale of their insurance operations to Hub International.  This is the largest transaction in the brokerage space that has been done in 2006.  In spite of this transaction, buyers are finding it tougher to find and do larger transactions.

What's the deal?  There are still quality insurance agencies and there are still a number of hungry acquirers.  Even if the quantity of candidate organizations has been reduced by the significant number of transactions over the past years, the laws of supply and demand should stimulate acquirers to get pricing to a level that would result in more activity.  What's the disconnect?  Why is there not more happening?

Over the last several months, we have had a lot of contact with our mid-size to large privately-held agency clients.  What we are consistently seeing are two factors that are dampening their interest and enthusiasm in considering third-party transactions.  The first, and most significant factor, is that their financial results are amazingly good.  The contingents that they received in 2006 (for 2005 results) have been strong, and for some, outstanding.  Investments that they have been making over the last several years and efforts to improve operating efficiencies are resulting in great profits and a lot of success.  They are getting outstanding financial returns from their businesses.  Even if they could sell out at a premium price, it is very difficult to find places where they can reinvest the proceeds and can get as good a return as they can in their own agency/brokerage operations.  Alternative investments don't look all that attractive compared to the results that they are achieving today.  In addition, by remaining privately-held, they are finding that they can enjoy a competitive advantage in the marketplace in a number of areas ranging from their recruiting of talented employees, to their ability to continue receiving contingent and bonus income (where a number of their public peers do not).  For all of these reasons, the majority of these firms are very optimistic about the future.

The second factor that is impacting their interest in considering third-party transactions is the perception, if not the reality, that the quality of life for them will deteriorate if they are not privately-held.  There are a lot of people working for privately-held firms that are doing so because their experience at the publicly traded brokers was not what they were looking for.  In addition, although they may be a vocal minority, there are agency principals that have sold that are extremely unhappy with life as a part of their acquirer.  Even in those situations where their acquirer is wonderful to work for, there is the inevitable loss of autonomy and control and the uncertainty of the future of some acquirers.  All of this is to suggest that there is a fairly strong perception that you give up a lot when you sell.

As a result of these two factors, we feel that several things are going to happen.  First of all, there will be more agents and brokers focusing their attention on remaining privately-held and growing their businesses.  With the strength of their operating results and their optimism about the future, they see little reason to sell unless the opportunity presented to them is simply too good to pass up.

Secondly, we feel that the price paid for quality acquisitions (as a multiple of earnings and revenues) will most likely rise.  Acquirers are going to have to review their acquisition models and weigh the cost of not doing larger, more attractive deals against the cost of paying a higher price.  Our guess is that a number of them will be willing to pay a higher price.

In our opinion, this will also cause some firms that did acquisitions in the past and who anticipated getting to a desired critical mass through additional acquisitions, to re-think their strategies or perhaps, their expectations.  Some will continue to go after quality acquisitions but do so "more aggressively."  Others will focus their efforts on organic growth and modify their expectations as to how quickly they can get to their desired critical mass. 

Finally, acquirers will continue to focus their attention on smaller targets where they will have more to choose from and less competition for premium pricing.  Some acquirers will broaden their appetite and begin looking for wholesale, excess and surplus lines or specialty operations. 

All things considered, it is a great time to be a privately-held insurance agent or broker in May of 2006.  Business is good, the future looks bright and there are a lot of people interested in acquiring you.  As far as those firms that are interested in acquiring those privately-held agents and brokers, growth through acquisitions is more of a challenge.  Success will continue to come to those that are strategic in their acquisitions, have good execution and operating skills, can offer a compelling financial opportunity and can provide an attractive quality of life and culture.  For those firms, the future looks good as well.

Bobby Reagan is President and CEO of Reagan Consulting, an Atlanta, Georgia based financial and management consulting firm working with many of the leading insurance agents and brokers and financial institutions in the country.  He can be reached at bobby@reaganconsulting.com.