Fruitful Season
Buyers Keep Picking Off Agencies

Insurance Journal
Andrew G. Simpson, Jr.
November 22, 2004

Insurance agencies continued to be picked off at a healthy clip throughout 2004 but experts believe buyers will still be hungry in the new year.

Several reports indicate that 2004 announced deals should exceed the number of transactions in 2003.  Total deals through three quarters of 2004 were already in the 180 – 185 range, which is about where the year ended in 2003, according to reports.

“It reminds me of the late 1990’s in the economy, although it’s not quite as extreme a market bubble.  The thinking is, ‘Everyone else is buying, so it must be a good idea,’” noted Alfonso Ventoso, vice president at Business Management Group (BMG), in Hartford, CT.

The challenge ahead may be whether buyers will be able to find many agencies that are willing to be taken from a plant that has been picked over rather thoroughly.  Observers will also be watching to see if the softer market lowers sellers’ expectations or causes them to wait.

Parade of buyers

Public brokers and banks continue to lead the parade of buyers.  BMG, out of Hartford, and WFG Capital Advisors, based in Harrisburg, PA, both report that public brokers have accounted for about 50 percent of all acquisitions thus far this year.  Brown & Brown, Arthur J. Gallagher, Hilb Rogal and Hamilton, Hub International and USI have been among the most active buyers in 2004, according to announced deals.

The continued high activity points out how public brokers have become more dependent upon acquisitions for growth.

“As product rates continue to soften and stabilize, public company brokers are accelerating their buying pace in order to close the gap on declining organic revenue gains,” Steven Wevodau, managing principal at WFG, commented recently.

In remarks before Connecticut agents recently, BMG President Sharon Cunningham confirmed that just as with large brokers “very few agencies are growing organically” and many are instead turning to acquisitions.

In addition to public brokers, banks have been busy.  BMG’s research indicates that banks have been buyers in about 15 percent of transactions, while WFG indicates banks have been involved in about 21 percent.

According to the latest survey of banks in insurance from the American Bankers Association (ABA), banks are continuing to fuel their growth in insurance by absorbing insurance agencies.  Of the 391 surveyed banks, 49 reported buying at least one agency.

Insurance Journal research shows that BB&T of North Carolina, BNC Corp. of Arizona, and Sky Financial of Ohio have been among the most active banks.

Local independent agents are buyers in about 8 percent to about 30 percent, according to varying reports.  Many times these deals go unannounced.  California, New York, New Jersey, Texas and Florida have had the most agencies acquired, many by out-of-state entities.

Recent agency valuations still reflect the considerable premium growth agencies saw in 2002 and 2003.  BMG estimates that in 2002 and 2003, premiums for all lines grew between 11 and 14 percent.  This premium growth, in turn, boosted agency valuations.  Although the market has softened in 2004, and premium growth has slowed to about 6 percent, this hasn’t yet filtered through to the acquisition scene.

“Valuations even through September have been pretty high,” said BMG’s Ventoso.

The more sellers hear this, the more they crave top offers.

Wishful thinking

“We are at an all-time high for expectations on the seller side,” commented Kevin Donoghue, Mystic Capital Advisors, a mergers and acquisitions group based in New York.

There may be some wishful thinking in reports that banks have been overpaying.  Overall, high-end price multiples were rarely paid, according to the banks surveyed by the ABA.  In fact, only 13.3 percent of the reported transactions exceeded a price of two times revenues.  Only 13.9 percent exceeded eight times EBITDA (earnings before interest, taxes, depreciation and amortization).  Sales prices range from about 5.5 up to 8 times EBITDA.

While there is no shortage of potential buyers, the crop of agencies to be bought continues to shrink.  The total number of agencies nationwide has fallen from an estimated 60,000 about 20 years ago to less than 40,000 today.

Not only is the overall agency plant smaller, it is more top-heavy with potential buyers as opposed to agencies looking to be acquired.  Many of the larger agencies think of themselves as buyers, not sellers.

BMG research shows that jumbo ($2.5 million or more in revenues) and large agencies ($750,000 up to $2.5 million) have expanded from 13 percent of agencies in 1987 to about 35 percent as of 2002.  Meanwhile, medium-sized agencies ($150,000 up to $750,000) have actually grown their share, from 41 percent to 45 percent, but dropped from a high of 54 percent in the 1996-1998 period.

The steepest decline in potential agencies to buy has been among smaller agencies (less than $150,000).  They represent only 20 percent of agencies today but were a much healthier 46 percent back in 1987.

In addition, many of the remaining smaller agencies have joined networks such as Strategic Independent Agents Alliance (SIAA).  This national agency network – international now with its Canadian operation – has signed 224 new agencies already this year – more than in all of last year.  SIAA now has more than 1,500 member agencies and is still growing.

While the “appetite is still on the other (seller’s) side,” as Ventoso described it, merger experts are pretty sure there remain agencies worth acquiring out there.  But getting to them is becoming more difficult.  These merger pros spend as much time trying to reach potential targets on behalf of sellers as they do performing due diligence or negotiating actual deals.  One result is that the same agency principals are being contacted repeatedly.

“A lot of areas seem pretty picked over.  Everyone’s calling the same agents.  Agents say, ‘keep me in your tickler file – I’m not ready just yet,” BMG’s Ventoso said.

Among the most likely sellers are agencies where the principal owner is 55 to 65 years old and has not looked into a perpetuation plan.  “It’s tough to do an internal buyout at age 65,” offered Ventoso, who warns that the best producers and employees often jump ship if not given a chance within a reasonable time to own a piece of the action.

BMG’s Cunningham told the Connecticut group that even though the “reality is that agents live forever,” they should still plan for succession.

Expectations of living forever could explain why so many agencies appear in no rush to sell.  “The soft market seems not to have sunk in with sellers yet, or at least hasn’t lit a fire under them.  Buyers are still having to woo them,” Ventoso observed.

Outlook for 2005

The softer market could eventually light a fire under some agencies just as the shrinking supply of eligible targets could also affect the pace of transactions in 2005.  The outlook for 2005 is further clouded by the effect of the investigation begun by New York Attorney General Eliot Spitzer and spreading across the country.

Still, advisors in the field say they are geared up to handle activity heading into 2005 that mirrors what has gone on in 2004, even with premiums falling.  They expect large brokers to continue to be the driving force in mergers.

WFG predicted that private equity groups might make headway into the market while financial institutions “appear to be retrenching.”

However, among the 49 banks in the ABA survey that purchased agencies in 2004, an overwhelming majority (89.4 percent) plans additional acquisitions.

Mystic Capital’s Donoghue suggested that program administrators and managing general agencies are beginning to attract more attention as targets from buyers as well.

Local independent agents also appear increasingly willing to shop across state boundaries to find a merger partner.  While they may prefer to sell to a local establishment, they are finding that the best offers sometimes come from out of state.  Also, an agency with branches in several states becomes a more desirable acquisition target than a single state agency.

There is some concern that the current brokerage investigations could put a damper on deals.  “The recent Eliot Spitzer case against Marsh may redefine the entire insurance brokerage segment and their appetite for acquisitions during the upcoming year,” Robert Lieblein, a managing principal of WFG cautioned.  “This is probably the most salient issue facing the market today and is too difficult to predict its outcome.”