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National Underwriter - Property & Casualty Edition,
May 2, 2005
Author: Steven S. Wevodau
and Allen Go
Spitzer probe spurs
divestitures of wholesalers; gives some buyers pause
Agency mergers and acquisitions are proceeding at a slightly
reduced pace compared to 2004, and external investigations
into business practices might be one of several culprits. A
closer look reveals that growth by acquisition continues to
be at the forefront of the industry.
During the first quarter of 2005, there were 60 announced
acquisitions of insurance brokers—a slight dip from the 67
announced transactions in the first quarter of 2004.
However, most industry experts concur that the overall pace
should mirror or exceed the figures of prior years.
The blockbuster deal of the year so far has been Wachovia's
acquisition of Palmer & Cay Inc., which reportedly had
revenues of $144 million in 2003. Wachovia stated in its
press release that the combined operations will have over
$400 million in annual revenues, which would make the firm
one of the top-10 insurance brokerages.
This acquisition is significant not only for its size but
also because Wachovia has not been particularly active in
making acquisitions of insurance brokers over the past
several years. The transaction was announced right after the
end of the first quarter and therefore has not been included
in first-quarter statistics.
Another significant 2005 transaction was the acquisition of
Hull & Company Inc. by Brown & Brown. Hull & Company is a
wholesaler that had annualized net retained revenues of
approximately $63 million. In July 2004, Brown & Brown had
raised $200 million in a private placement, and appears to
be aggressively looking for ways to deploy this cash through
strategic acquisitions.
Brown & Brown's acquisition of a wholesaler is in marked
contrast to recent actions by Willis Group Holdings and
Aon. On Feb. 15,
Willis announced that it sold off its U.S. wholesale
unit—Stewart Smith Group—to American Wholesale Insurance
Group Inc. Stewart Smith reportedly had revenues of $75
million in 2003.
The following day, Feb. 16, Aon
announced that it was exploring the sale of
Swett & Crawford, which
reportedly had revenues of $267 million in 2003. Marsh &
McLennan Companies Inc. also announced plans to divest
itself of a subsidiary—its private equity unit
MMC Capital—to a team
of MMC Capital
employees.
These divestiture announcements by three of the world’s
largest brokers reveal a heightened sensitivity to having
any appearance of a conflict of interest.
With investigations by New York State Attorney General Eliot
Spitzer casting a negative image on the industry, it would
not be surprising to see additional divestitures coming out
of the largest industry firms. There are numerous privately
backed investment groups and other very large firms that
stand ready to seize these types of opportunities.
Another area that might come under close scrutiny is the
reinsurance brokerage arms of these companies. Mr. Spitzer
has been investigating possible tying arrangements, where
reinsurance placements by an insurance carrier affect the
amount of retail business that is placed through this same
carrier. The business models of the largest brokers could
look significantly different once the fallout from the
investigation settles.
Aside from MMC, it appears that the other publicly-traded
insurance brokers continue to aggressively pursue
acquisitions. Table 1 lists acquirers who announced more
than one acquisition during the first quarter of 2005.
Stewart Information Services continued to snap up title
insurance agencies across the country. In addition to Hull &
Company, perennial acquirer Brown & Brown purchased two
wholesalers as well as two retail operations.
Willis continued to acquire internationally, and also made
two U.S. acquisitions of benefits firms. (In the interest of
disclosure, WFG Capital Advisors LP advised on the sale of
one of these benefits firms—CGI Consulting Inc.) Arthur J.
Gallagher bought two retail operations as well as the
reinsurance brokerage assets from JLT Re Solutions Inc.,
while Aon’s three acquisitions were all international in
nature.
While the number of transactions dropped slightly from last
year’s first quarter, there was a more significant decline
in terms of deal value (Table 2). First-quarter 2005
transactions had an aggregate deal value of $112 million
when compared to $407 million in the same period last year.
Much of this disparity will level out with Wachovia’s
acquisition of Palmer and Cay in the second quarter;
although the announced value may not be disclosed it should
clearly serve as a footnote.
Last year’s results included a number of acquisitions of
significant size, including:
• Hub International's acquisition of Talbot Financial Corp.
($90 million).
• LandAmerica Financial Group's acquisition of County Title
Holding Corp. ($90.5 million)
• Willis's acquisition of Willis A/S from its management
group ($57 million).
• Brown & Brown's acquisitions of Waldor Agency Inc. ($39.5
million) and Statfeld Vantage Insurance Group L.L.C. ($34.5
million).
• U.S.I. Holdings' acquisition of Dodge Warren & Peters
Insurance Services Inc. ($38.6 million).
In comparison, the largest announced deal value during the
first quarter of 2005 was National Financial Partners'
acquisition of Highland Capital Holding Corp. ($48.4
million). Transaction values for smaller deals are not
typically disclosed, which can create disparity between
announced figures and the overall consideration paid.
An interesting dichotomy exists between the number of
acquisitions of retail and wholesale insurance brokers (see
Table 3). In the first quarter of 2005, there was a decline
in the number of retail operations acquired compared to
prior year. In contrast, the number of wholesale
acquisitions increased, albeit off of a smaller base.
Brown & Brown was the most active acquirer of wholesalers,
announcing three deals during the first quarter of 2005.
While Willis has already shed its wholesale operation and
Aon is clear that it will divest itself of this type of
business, it appears that other competing brokers have no
concerns about acquiring these types of firms.
A review of the number of insurance agencies and brokerages
acquired by type found that many of the categories showed a
slight decrease from 2004 (see Table 4). One notable
exception was property-casualty personal lines, where the
majority of activity took place among personal auto
insurance brokers, as well as technology-oriented personal
lines firms, including InsLogic Corp. and ComparisonMarket
Inc.
The primary bulk of acquisitions still resides within the
full-service and p-c commercial segment.
Aggregate revenues of firms acquired during the quarter
decreased slightly from last year as well, to $263 million
in 2005 compared to $299 million in the first quarter of
2004 (see Table 5). Significant announced transactions
include:
• American Wholesale Insurance Group's acquisition of
Stewart Smith Group from Willis ($75 million).
• Brown & Brown's acquisition of Hull & Company Inc. ($63
million).
• National Financial Partners' acquisition of Highland
Capital Holding Corp. ($62 million).
Similar to the announced deal value statistics, there is
inconsistent reporting of the revenue volume of many of the
smaller acquisitions, which can cause volatility in
correlating statistics.
The outlook for consolidation continues to support a very
high level of activity.
Concerns over the outcome of the contingent commission
debate have caused some firms to question the long-term
viability of this revenue segment. However, most industry
participants have concluded that while the overall
compensation structure may ultimately change, it is highly
unlikely that regulators or carriers will take a bite out of
the broker’s share of the pie.
Most leading acquirers contend that their acquisition
pipelines are well stocked, and they will continue to seek
out strategic opportunities in light of the debate over
contingency fees. It is highly likely that announced
transactions will continue to trend upward during the course
of 2005.
Steven Wevodau is a managing
partner and Allen Go is a director at WFG Capital Advisors
in Harrisburg, Pa.
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