Congrats to the 450+ agencies and brokerages that sold their insurance distribution operations in 2015. That’s an absolutely staggering number considering the next highest annual total was 325 back in 2012.
That was the year when the federal capital gains rate was about to increase and firms were racing to beat the deadline.
The biggest question that exists as we enter 2016 is whether this activity will continue at current levels. Can the volume—and maybe even more importantly can the multiples—remain at the high watermarks we saw throughout 2015?
The likely answer is they can. Many industry professionals believe the insurance distribution space will transact more acquisitions throughout the next 10 years than it did in the past 10. However, there is also a prevailing belief the multiples will go no higher. Without a crystal ball, it’s difficult to tell, but let’s take a quick look at the factors affecting them.
Why Multiples Would Drop
Interest rates are rising. The Federal Reserve raised interest rates 0.25 percentage points. It was the first increase since 2006. It’s still too early to understand the impact this could have on private-equity backed and public brokerages’ ability to borrow. The debt markets have been so good and cheap over the past four years, it is likely this slight increase will still afford buyers strong returns. It’s probably not enough on its own to drive the multiples down, but it is a possibility.
Stock market decline. Last year marked the first time since 1939 (during Franklin Roosevelt’s presidency) that the Dow Jones Industrial Average closed in negative territory in a pre-election year. I am not exactly sure what this says globally about the U.S. or our economy, but it does have an impact on publicly traded brokerages. The stock price of public brokerages plays a major factor in the multiple they are able to pay for an acquisition. They will never pay a price that creates a dilutive effect on shareholder value. This means they have to pay less than they are worth on the open market. All deals have to be accretive. So when stock prices are down, multiples typically come down with them.
Volume. Global M&A deal volume in all industries surpassed $2 trillion in 2015—up about 17% from 2014. Globally, however, the deal count was actually lower, but the average deal size continued to increase. It is possible that a hangover effect will occur in 2016, since so much volume was acquired in 2015. This could affect our industry.
Why Multiples Would Hold
Demand is firm and potentially increasing. The acquisition appetite is not expected to slow down. With multiple firms changing private equity sponsors, there is new committed capital that needs to be deployed. Additionally, Wells Fargo recently announced its intent to get back into the acquisition game after previously sitting out the past few years. As demand continues to outpace supply, market competition should keep valuations at current levels.
Organic growth is struggling. With the slow downward shift in property-casualty rates during the past 18 to 24 months, it has become harder for most firms to grow organically, as their in-force book is flat or constricted. If the same overall growth hurdles continue, it’s possible buyers will push to acquire more revenue as their annual organic growth numbers struggle.
Weighted average owner age. As of June 30, the weighted average owner age (calculated by the age of the individual owner times their ownership percentage) was 54. Our proprietary database also shows 59% of the stock of independently held firms is in the hands of baby boomers. Most independent insurance agencies have not adequately reinvested in human capital and will probably sell their firms over time. The need for liquidation or monetization of a very lucrative asset will continue to bring quality agencies to the marketplace.
Legislation. Recent tax legislation approved by Congress at the end of 2015 has permanently shortened the post-C-corporation-to-S-corporation-conversion “built-in gains tax” period from 10 to five years. This will allow agencies that were currently waiting out the historical 10-year period to be able to come to market sooner than originally anticipated. This potential influx of new sellers probably won’t completely satisfy buyer demand but should contribute to increasing overall activity.
There continues to be volatility in the global economy and instability in the security of many countries. These ongoing issues will cast a cloud of uncertainty over all industries and remain a wildcard that could affect the overall marketplace. These variables, and many others, will keep us on our toes in 2016. Market momentum will continue for the time being. How long is still to be determined.
2015 Final Tallies
The top acquirer in 2015 was Acrisure, with 39 announced transactions (although they are privately communicating more than 50 deals). This brings the announced total for 2015 to 449. This doesn’t account for all Acrisure acquisitions (some from NFP Corp. and other smaller deals that many of the major buyers don’t release). This likely brings our overall deal count much closer to 500.
The top five acquirers for the year (based upon announced transactions and in no particular order) were: AssuredPartners, Hub International, Arthur J. Gallagher, Confie Seguros and Acrisure. This does not include BroadStreet Partners, which does not report M&A activity but privately disclosed more than 25 deals.