The insurance distribution segment is made up of more than 30,000 brokerage agencies with many medium- to small-scale agencies. Many of are often lacking the financial or technology infrastructures of larger competitors, and in many instances, the agencies are populated with agents nearing retirement.
The average age of brokerage executives is 60 years old, and the U.S. Bureau of Labor Statistics indicated that nearly 700,000 insurance professionals currently are 55 years old or older. In addition, 400,000 brokerage employees are expected to retire within the next five years. In 2017, there were approximately 1.1 million insurance agents, brokers and service employees in the United States according to industry data.
Private Equity Growth
Private Equity backed funding is nothing new to the insurance brokerage segment, but it has been very prominent over the last seven years. Mergers and acquisitions of insurance agencies in 2017 totaled 604, a 31 percent increase over 2016 according to industry data. In 2017, private equity/hybrid buyers accounted for 382 transactions, 63 percent of the total, compared with 56 percent in 2016.
M&A activity in 2018 was very strong although I believe when the final numbers are reported for 2018, the number of acquisitions will be slightly less than 2017, but the private equity-backed acquisitions will most likely exceed 60 percent.
Early indications are that eight of the top 10 buyers in 2018 are private equity-backed firms compared to 2008 when only four of the top 10 had private equity funding.
In 2016, private equity-backed companies completed 55% of all broker acquisitions. Nine out of the top 10 acquiring companies across 2015 and 2016 were private equity-backed firms. Gallagher & Company was the only public company on the mega-buyers list.
Between January 01, 2010 and December 31, 2016, Gallagher completed almost 300 acquisitions. In 2017, Gallagher completed 39 transactions, more than half of which were within its US retail P&C and benefits operations, and in the first half of 2018, the company made 18 acquisitions, and 12 in the 2nd half of 2018.
You don’t have to look any further than Caledonia, Michigan-based Acrisure to see the positive impact from the right private equity funding partnership. Greg Williams, founder of Acrisure, has become the most prolific acquirer in the U.S. Williams and his team made over 100 acquisitions in 2018 and has made more than 400 acquisitions since 2013. Williams acquisition strategy has grown Acrisure’s annual revenue from $650 million to $1.5 billion in two years and increased the company’s enterprise value to more than $7 billion today from $2.6 billion in 2016.
Acrisure has plenty of “dry powder” after a $2 billion investment by GSO Capital Partners and Harvest Partners SCF LP, both based in New York City, and Switzerland-based Partners Group late last year, so I expect that Acrisure will be active in 2019.
Industry data indicates that private equity firms’ “dry powder’’—the amount raised by firms that is not yet invested—is slightly over $1 trillion, according to a report in December of 2017 by Preqin. This is a clear indication that there is plenty of private equity funding available and no obvious ending in sight for the continued M&A activity and valuations.
Should I sell or Not?
Private equity firms are the new bankers for insurance brokerages. The valuations right now are at an all-time high, and that’s good for the seller. While price is important, a strong culture fit is critical too.
The last four years has seen the value continue to increase. Looking back to 2015 activity, the average base selling price was a pro forma EBITDA multiple of 7.6x and based on the early data on 2018 sales and my personal knowledge of over 90 closed deals; the multiple increased to about 8.71. That means that the potential maximum payout for the 2015 sellers could reach 10.31x and the 2018 sellers could see a pro forma EBITDA multiple of 11.01.
With over $1 trillion of “dry powder” available, the next few years will see a lot of M&A activities.