Coming Out Swinging

Like a prized boxer trying for an early first round knockout, January came out swinging. There were 35 transactions announced and completed making this the third largest January in a decade.

It was greater than any month in 2013 except December (37 deals). Is this a bit of rope-a-dope or a sign of a strong 2014?

Part of January’s news was the announcement of three very large transactions. USI will acquire 42 offices from Wells Fargo—a win-win for both organizations. For USI, it helps solidify current locations where they can now gain economies of scale combining offices as well as enter some new markets in a significant way. It allows Wells Fargo to focus solely on core and strategic markets where insurance has the best growth potential and a stronger partnership with bank customers.  Wells was one of the most active acquirers early this century, but has not announced a transaction since 2011. The revenue potential has not been disclosed, but the number of offices points to a very large transaction.

Brown & Brown announced it is acquiring The Wright Insurance Group, which has a specialized in national flood insurance program. This is the third major deal for B&B in two years (Arrowhead and Beecher Carlson). Wright will fall within the Programs Division of Brown & Brown, which includes Arrowhead.

Wright is reported to have $121 million in pro forma revenue and $58.8 million in pro forma EBITDA—a 48.5% margin. The purchase price of $602.5 million equates to about 5x revenue and 10.25x EBITDA. Brown has confirmed it will continue to acquire firms in the $5-$10 million range. These three large transactions, it said, were about opportunity and good people.

Marsh & McLennan Agencies made the final major announcement in early February when it acquired Barney & Barney. This is MMA’s first acquisition west of Texas and will add $100 million of revenue. This deal propels MMA national revenues beyond $500 million. It is likely this entrance into California signals additional MMA expansion across the western part of the US.

Another strong signal, 13 January deals were wholesale related. There were fewer than 40 wholesale deals in both 2012 and 2013. We anticipate a continued rise in wholesale transactions. Private equity is looking to deploy capital in all areas of insurance distribution.

Based on preliminary year-end results, valuations have stayed at a high watermark with more money being pushed into the guaranteed portion of the payment. Agencies are starting to take notice of the activity in the marketplace and considering their strategic options. We feel it is likely momentum will continue through the year. If we had to call it today, 2014 would deliver a knockout punch to 2013 figures.