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National Underwriter - Property & Casualty Edition, July
2004
Author: Steven S. Wevodau
A 2004 midyear review of
announced agency consolidation statistics indicates that the
pace has increased markedly over prior periods. Through June
30, 2004 announced agency transactions totaled 117,
representing 64 percent of the total announced deals
reported for 2003.
It remains clear that this accelerated pace of consolidation
should continue into the foreseeable future. To put the pace
of agency acquisition into perspective, a straight line
projection of 2004 announced transactions would result in a
total of 234 transactions representing a 29 percent increase
over the 182 announced in 2003. This projected transaction
total is higher than any other period dating back prior to
2000.
Banks continue as one of
the leading agency and brokerage acquirers, accounting for
26 of the 117 announced transactions for the first six
months of 2004. However, it is important to note that this
trend appears to be slowing.
During calendar-year 2003, banks accounted for about 30
percent of all agency purchases. The 26 announced deals
through mid 2004 indicate a continuing decline, representing
only 22 percent of the total.
Many speculate that banks have saturated their footprints
and are becoming much more selective or completely shying
away from the prospect of owned insurance operations. This
merely represents stabilization of one segment as many
insurance carriers are beginning to express greater interest
in acquiring and owning insurance distribution, representing
a slight shift in the mix of active buyers.
Career insurance brokers continue to acquire at a fever
pitch, representing 64 announced deals, or 55 percent of
2004 total agency acquisitions versus 46 percent for 2003.
As the major commercial insurance markets continue to
experience rate stabilization, leading firms struggle to
meet shareholder demands of growth by maintaining status
quo. This has caused many leading brokers to more
aggressively deploy capital to acquire a portion of their
growth which supplements revenue and earnings.
This acquisition trend is expected to continue while the
cost of capital remains low, and while the product rate
environment points toward softening.
Other acquirers, mainly made up of niche markets, carriers
and financial services companies, continued to make an
impact on agency acquisitions through midyear, representing
approximately 23 percent of announced deals. Niche market
distribution continues to be a hot commodity as financial
services firms and carriers are actively seeking out product
distribution and underwriting channels to supplement their
growth.
Likewise, private equity groups are also emerging as a
leading acquirer type as such groups look to assemble and
build formidable national platforms.
In total, as some banks and financial institutions retrench
and take inventory of their insurance programs, new
acquirers have begun to emerge to team with the career
brokers to increase the demand for insurance platforms.
Expectation remains that this pace will continue until there
is a landmark legislative change, or a macro industry event
reshapes product rates.
To better understand the accelerated pace of agency
acquisitions, we must take a closer look at four key areas
that are occurring within the market:
• Rate softening.
The softening product market serves as a dual-edged sword in
many respects.
As leading public company brokers struggle to sustain
organic growth, they become forced to aggressively
supplement declining or lost revenue with that which is
acquired. The primary indication of this is clearly
represented by the impact that leading brokers have had on
agency consolidation through six months of 2004. Even Marsh
& McLennan has begun to emerge as an acquirer, while the
giant was able to shy away from acquisition activities
during the height of the hard market.
The second side of the sword lies in the impact that the
softening market has on the privately held brokers. As the
large, well-capitalized public companies emerge and battle
for middle-market clients, privately held firms struggle to
compete and retain many clients.
This results in many firms reassessing the competitive
landscape while trying to prognosticate how long it will be
until rates begin to increase. Many have opted to at least
explore the prospect of joining a larger organization in
order to preserve their infrastructures and to monetize
their investments in the business.
An analysis of the top-eight leading brokers indicates that
as of the quarter ending March 2004, the composite organic
(non-acquired) growth was a mere 5.8 percent versus 13.9
percent for the same period in 2003. This data highlights
the fact that the leading brokerage segment is slipping in
its ability to contend with rate stabilization and further
exacerbates the need of members of that segment to continue
to demonstrate growth through acquisition.
• Long-term capital gains tax.
The reduction in the long-term capital gains tax rate has
caused many privately held agency owners to pause and
reflect on their futures. Owners are assessing the potential
impact of the 15 percent capital gains tax rate and
contemplating their strategies as this opportunity may not
remain for an extended period.
Many who otherwise would have delayed succession-planning
strategies for another five years are acting now, as they
see the value of this rare opportunity of such low rates and
are not taking the risk of any legislative changes. As the
presidential election appears on the horizon, many believe
that this window of opportunity could be swiftly closed.
• Intensified competition.
As mega-brokers aggressively pursue middle-market clients,
competition remains incredibly stiff. The large
international firms with countless resources, markets and
services are now vigorously contending to establish a larger
middle-market share that was once left to the smaller firms.
This competitive onslaught has severely crippled many niche
and middle-market privately held firms who for decades
enjoyed their position in the market. The result has caused
many privately held agencies to reassess their positions
with many opting to join forces with the larger,
super-regional and national firms.
• Benefits targets.
The acquisition of benefits brokers represents the newest
craze among consolidators. As benefit costs continue to
rise, commissioned brokers can receive revenue "lift" and
enjoy significant growth, similar to the property-casualty
firms during the height of the hard market.
The leading consolidators, who are scrambling to seize
growth segments, are now keenly focused on trying to
establish greater market penetration in this product area.
Likewise, many banks that have invested in their commercial
insurance platforms are now looking to further extend
cross-selling opportunities by broadening insurance
expertise within their institutions.
Because the benefits market is largely regional, this leaves
an incredibly fragmented market, which is made up of a
larger number of smaller operations. As the market shifts
more aggressively into this segment, it is likely to expect
that consolidators will need to conduct a greater number of
smaller acquisitions in order to create critical mass.
Without a marked change in course of the product pricing
cycle, agency consolidation is expected to continue at an
even more accelerated pace throughout the next twelve
months.
As larger brokers vie to sustain growth, they are in a
position to deploy capital to buy their top line. Inevitably
this leaves the smaller firms to face the prospect of
joining the larger public environment, or to patiently wait
out the market cycle.
Many smaller and midsize firms that resolved to ride out the
cycle have opted to work smarter and are re-evaluating their
loss-leading products, markets and regions in an attempt to
gain greater efficiencies within their businesses.
Carriers have begun to re-emerge as consolidators as many of
them are looking at alternative ways to distribute their
proprietary products as well as looking at benefits of
owning their distribution system in some measure.
Very interesting times are ahead for the insurance
distribution system.
Steven Wevodau is a managing principal of WFG Capital
Advisors in Harrisburg, Pa. He can be reached at
swevodau@wfgca.com. |
