There were some blockbuster acquisitions in 2013, but according to one industry expert, a very active January may make for a flurry of M&A activity in 2014.
“The January flurry follows the very robust fourth quarter of 2013,” says Timothy J. Cunningham, managing director of OPTIS, an investment banking and financial consulting firm specializing in the insurance industry. “Such momentum seems to indicate 2014 will be a very active year.”
For January, 46 M&As were recorded - a dramatic jump compared to the same months in the previous six years:
2013: 33
2012: 35
2011: 34
2010: 19
2009: 25
2008: 32
Cunningham points to two primary factors driving the future of merger and acquisition activity.
“On one hand, the PE backed buyers seem to have taken the upper hand. Acquisition capital is not an issue and the anecdotal evidence would suggest they have pushed the multiples a bit in order to induce sellers to cast their lot with this segment,” he says. “On the other hand, the conventional public brokers need to grow and expand their earnings base or suffer the consequences with pressure on their stock price. Organic growth has been good recently albeit up and down over the years and thus the next best alternative is to acquire the growth.”
Mergers and acquisitions of insurance agencies fell in 2013, with 248 reported transactions in the United States and Canada, according to OPTIS Partners’ new semi-annual survey – down from the 299 transactions in 2012.
“Last year marked a return to normal levels as buyers assimilated all their 2012 deals and began to refill the pipeline of potential target sellers,” says Cunningham. “It was a seminal shift in the landscape, as PE-backed acquirers topped the chart for the largest number of transactions for the first time.” (continued.)
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Private-equity backed agencies were 2013’s biggest buyers, making 94 acquisitions compared to 88 in 2012. The top PE-backed buyer was Hub International, which made 25 acquisitions.
PE-backed buyers were followed by privately owned insurance agencies (85), public brokers (33), banks (27), and all others, including carriers (9).
On the seller side, sales of property-and-casualty-focused agencies dominated, with 42 percent of all sales. Deals for agencies selling both P&C and employee benefits accounted for 22 percent of transactions. Employee benefits agencies accounted for 24 percent of sales, and other, 12 percent.
As for the coming year, Cunningham points to the large cohort of aging principal brokers pushing acquisitions and mergers.
“Not surprisingly the demographics of agency principals matches the demographics Canada. The massive boomer generation is coming of age and in need of implementing their exit strategy,” he says. “The recent Big I Agency Universe Survey disclosed that 35 per cent of all agency principals holding more than 20 per cent of the equity in their firms are age 56 and older. There should be a large number of targets needing to partner with an acquirer and thus providing continuing momentum to keep the M&A machine moving forward.”
