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Independent Agent Magazine, December 2004
Authors: Steven S. Wevodau,
Allen Go, and
Daniel Price
As premiums rates have
either stabilized or declined across many lines, insurance
brokers have come to rely extensively on acquisitions to
prop up their revenues and earnings. The composite
percentage of overall organic growth for the three months
ending June 30, 2004 was less than 44%, according to an
analysis by WFG Capital Advisors of the press releases and
SEC filings of the largest brokers nationwide. In turn,
this indicates that over 56% of the selected brokers’
composite growth rate came through acquisitions.
To accurately gauge how a
company is growing revenues internally, excluding the effect
of acquisitions and currency fluctuations, organic revenue
growth is used as a benchmark. Individual company and
composite results clearly show there has been a downward
trend in organic growth during 2003 and the first half of
2004. The soft market has clearly made its presence known
during the second quarter with three companies reporting
negative organic growth rates. With declining organic
growth rates, companies who are active acquirers will rely
increasingly more on acquisitions to reach targets set
internally and by Wall Street analysts.
The aggressive acquisition
strategy employed by many of the leading brokers is used as
a way to offset negative organic growth trends. The
softening insurance market presents a headwind to insurance
broker’s results – they can’t realistically expect organic
growth rates to be as high as in the past when the hard
market was in effect. To meet Wall Street’s targets,
acquisitions are playing a larger role in hitting those
expectations. Insurance brokers may have become victims of
their own successes as a result of the growth they achieved
in the past. As many of these brokers get larger, their own
size can become a detriment in terms of the impact that an
acquisition can have on their results. These companies will
have to make more acquisitions, increase the average size of
agency acquired, or do a combination of both to maintain
their overall revenue growth rates. An example of a company
that is on pace to doing more transactions is Brown & Brown,
which has completed 21 acquisitions already through July of
this year compared to 23 for all of 2003. Hub
International’s acquisition of Talbot Financial Corporation,
which generates approximately $100 million in revenues, is
an example of a company making larger sized acquisitions.
The change in the
insurance marketplace also has an effect on the remaining
independent agencies and brokers. It has been noted by some
of the publicly traded companies that the softening market
could provide an impetus to agency owners and principals to
more seriously consider selling their firms to a larger
partner. Privately held agencies and brokerages previously
could afford to go with the flow of a hard market and see
their revenues and income rise accordingly. Now that the
tide has turned, these same agencies have to seriously
consider their fates in a softer market.
The soft market may
actually hasten the consolidation trend currently occurring
in the industry. Announcements made during conference calls
and within earnings releases by several companies under WFG
Capital Advisors’ coverage state that their pipelines remain
full with potential acquisition candidates. The soft market
is, in effect, pushing many independent agencies and brokers
into the arms of some of these active acquirers. A
secondary influence on the consolidation trend is the
presidential election, which may provide another incentive
for agency owners to sell and take advantage of the current
capital gains tax rate. These factors combined should make
for a busy second half of the year for merger and
acquisition activity.
Allen Go, director with WFG Capital Advisors LP, has five
years of experience in investment banking and corporate
finance. Daniel B. Price, senior associate with WFG, is
primarily responsible for conducting industry research and
analysis in addition to performing business valuations and
financial modeling. Steven S. Wevodau,
managing partner of WFG, possesses extensive industry
expertise in both the property-casualty and life and health
industry. |
