Following a banner 2015, the insurance industry is poised to have another strong merger-and-acquisition year, although deal-making may not look quite as lucrative for sellers as it has in the past.
Last year was the most active year for mergers and acquisitions across all insurance-industry sectors in the United States, according to an annual report by Deloitte Consulting LLP. The number of deals through November surpassed the $5 trillion mark in aggregate for the first time, representing a 37 percent increase from $3.7 trillion in 2014.
“You’ve got a lot of the smaller firms selling out,” said Natale “Nat” Calamis, president and CEO of Starkweather & Shepley Insurance Brokerage Inc. “Equity markets and the low interest-rate environment say it’s time to get out.”
The high volume of consolidations is happening regionally – as it is nationally – where large companies and private-equity firms are acquiring smaller firms, aggressively rolling up the industry. The trend began about five years ago, according to Guy Asadorian Jr., wealth director at BNY Mellon Wealth Management in Providence, who says private-equity companies especially have been attracted to the insurance industry because of the high rate of reoccurring revenue and reduced levels of risk.
“Private-equity firms realized a number of years ago that insurance is a fragmented market and there was an opportunity to come in and consolidate these companies,” Asadorian said. “Ten to 15 years ago, acquirers of insurance agencies saw risk in the fact that the owner of an agency had all the relationships with the clients, so those relationships would be at risk if the owners left. I think over time people figured out a way to make the acquisitions, keep the name of the agency independent for a while and slowly integrate the acquired business so those relationships sustained.”
Rhode Island insurance companies have been on both sides of the recent flurry of buyouts. Calamis, who after more than 35 years at Starkweather & Shepley is retiring at the end of this year, has led the company through a number of recent acquisitions in outside markets. The state’s largest independent agency most recently acquired Port Royal Insurance Agency in Naples, Fla., adding to its growing presence in the Sunshine State, and last year also bought two agencies in Connecticut, expanding its regional footprint. Calamis says the company has acquired 16 companies in the last seven years.
“We’re an acquirer. We’re not even thinking about selling,” he added.
Last summer, Richmond, Va.-based The Hilb Group LLC bought Cornerstone Group in Warwick and Gencorp Insurance Group in East Greenwich. The Virginia-based insurer said at the time it would combine the operations and the 115 employees working at the two firms within 18 months. The Hilb Group’s local buyouts were a part of a larger strategy to grow through targeted acquisitions in the middle-market insurance brokerage industry. The Virginia-based company now has 33 offices in 10 states.
“Acquirers have the opportunity to increase profits by eliminating redundant expenses,” Asadorian said. “The increased volume of business gives a bigger agency better pricing power with the insurance carriers they represent.”
And the trend is happening at all levels. Last year, Ace Ltd. bought Chubb Corp. for $28.3 billion, which was the property and casualty segment’s largest-ever deal, according to Deloitte.
“Five to 10 years ago agencies were valued at four to five times EBITDA [earnings before interest, taxes, depreciation and amortization] cash flow and the seller would get half of that in cash and the rest paid out over a five-year period,” Asadorian said. “Now, companies are being valued at up to 10 times EBITDA cash flow and the transaction structure is almost predominantly all cash.”
The large deals, however, are making it more difficult for smaller industry players, because of the need for a large amount of cash on hand, which is another reason private-equity firms and bigger insurers have played such a large role in the merger and acquisition trend.
But there are signs that these big-time deals, or “mega transactions,” as Deloitte calls them, could slow in 2016.
“Overall sectorwide transaction volume in 2016 may be no less than what we’ve seen in 2015. Aggregate deal value, however, could be less since 2015’s total is impacted by mega transactions that may not reoccur,” according to the report.
Regional trends will likely follow nationwide trends, Calamis predicts, but Starkweather & Shepley will likely take a more cautious approach to the market, as commercial prices are trending downward and the size of the deals are so big.
“We’re taking a deep breath because we don’t want to get burned overpaying for an agency, so we’re watching it very closely,” Calamis said. “We just looked at another three in the last four months, but we’re getting a little more conservative.” •
