Father Time Will Prevail

You have heard the saying before, right? It typically is used in relation to aging athletes as they attempt to hang on and extend their careers. 

Father Time slowed down Michael Jordan and Kobe Bryant. Father Time will also eventually catch up to Tom Brady, even though he has seemed to elude it as he earned his third NFL Most Valuable Player Award at the age of 40 (but missed out on the Super Bowl MVP).

Father Time also seems to be catching up to the insurance industry. The 2017 deal count has now been confirmed at 557 announced transactions. That is 101 deals—or 22%—higher than 2015’s record of 456 transactions. That is a staggering amount of supply.

It seems like 2017 was a pretty good year for the insurance industry. Early indications from MarshBerry’s proprietary database are that the average agency posted about 5% organic growth—up slightly from the prior year. Additionally, S&P Global is estimating 4.7% growth in net written premium for 2018.

So firms are growing at a steady clip, the rate environment is trending upwards and the economy is expanding. It’s a pretty good recipe for continued growth and prosperity for agency owners.

But they all seem to keep selling. Why? Pricing is pretty good right now. Actually, valuations are continuing to hold at a high water mark for the industry. However, when you begin to peel back the onion, there is more to it.

The reality is the industry is aging and the collective whole just isn’t reinvesting at a fast enough pace to counteract Father Time. The MarshBerry “2018 Retail Market and Financial Outlook” says 77% of retail insurance distributors believe their next generation of staff will be capable of taking over the agency. However, just 31% of respondents provide a stock ownership opportunity for these high performers in their firm. The moral of that story? We think you’re good enough to take over, but we just aren’t interested in offering you the wealth creation opportunity.

Are the high multiples in the industry causing owners to sell prematurely, or is the lack of reinvestment and diversification of equity ownership forcing the sale? Frankly, I am not sure it matters.

MarshBerry’s research shows baby boomers hold about 59% of the ownership of independent agencies and brokerages in the United States. I believe even if valuations drop, owners will have no choice but to continue to sell at a rapid pace.

The market conditions with 30-plus viable buyers in the retail insurance space are creating a competitive environment that is keeping valuations at record highs. We estimate demand for acquisition in 2018 will exceed supply by roughly four to one. Yet, for most agency owners, we believe it is a matter of not if but when their independent run will eventually come to an end.

Some owners are aggressively reinvesting, and others are selling before their backs are against the wall. Yet a subset of owners will allow Father Time to dictate their eventual sale. Which path is yours?

January Market Update

Deal activity appears to have gotten off to a slow start in 2018 following 2017’s strong finish. However deals are announced retroactively throughout the year, so it is likely we will see January figures move higher over the next several months.

There were 25 deals announced in January, down from 44 in December and 53 in January 2017.

Gallagher did three deals while Ryan Specialty Group, Integrity Marketing Group and AssuredPartners each did two acquisitions. Both Gallagher and AssuredPartners were among the top five most active buyers in 2017.

Independent agencies represented more than 70% of the announcements in January (18 of 25), while seven of the 18 were backed by private equity. Property-casualty agencies continue to be the most popular targets (60% of January totals) along with retail agencies (68%).

Securities offered through MarshBerry Capital, member FINRA and SIPC. Send M&A announcements to M&A@MarshBerry.com.