The state of the M&A marketplace
Over the past several weeks, MarshBerry has fielded a number of calls from clients inquiring as to whether merger & acquisition (“M&A”) deals are being completed during the COVID-19 crisis. To many, MarshBerry’s answer has been a bit of a surprise: Yes, deals large and small are closing, and at values which sellers find very attractive. More specifically, yesterday MarshBerry reported that the insurance distribution M&A marketplace has heated up in the past several weeks, nearly to pre-COVID levels. Through the first six months of 2020, valuations for Platform transactions have increased over year-end 20191. Furthermore, in contrast to conventional wisdom, the inventory of sellers seeking a strategic buyer appears comparable with pre-pandemic levels.
Perhaps even more remarkable is that this M&A trend is amplified in the wholesale, managing general agent (“MGA”) and program administrator sectors of the distribution marketplace. Over the past 30 days, we have seen several significant announcements involving wholesalers and specialty MGAs with binding authority:
- Ryan Specialty Group is merging with AllRisks, Ltd.;
- EPIC Insurance Brokers & Consultants is merging with JenCap Holdings to form Galway Insurance Holdings;
- JenCap is acquiring Quaker Special Risk (as part of its merger with EPIC); and
- Specialty Program Group (Hub International Limited) is acquiring two MGAs: environmental specialist Beacon Hill Associates, and transportation specialist Avant, LLC2.
Sensing that buyer and seller appetites were increasing, MarshBerry conducted a pulse survey of wholesalers, MGAs and program administrators at the end of June 2020. With nearly a 50% response rate, survey respondents overwhelmingly confirmed their interest in making acquisitions in the near term. A full 80% of respondents indicated that they were either “extremely interested” or “moderately interested” in completing one or more acquisitions during the remainder of 2020. Eight percent indicated that they were “cautiously interested” or “somewhat interested” in completing an acquisition in the second half of 2020. Only 12% indicated that their acquisition activities were “on hold” for the remainder of 2020.
For any specialty insurance buyer, there are a number of factors that drive an acquisition program: strategic needs to expand products, markets, and/or distribution. Profitability levels of underlying business lines can also greatly influence a buyer’s appetite. MarshBerry believes that current property & casualty (“P&C”) rate increases may be having an outsized influence on buyer appetites. In the same June 2020 survey, MarshBerry asked its specialty clients what their organic growth rate expectations were for all of 2020. MarshBerry expected that single-digit growth would be the consensus, especially following a sluggish 2Q20.
Were we wrong! Nearly 70% of respondents indicated they expected organic growth would equal or exceed 10%, while an additional 8% expected organic growth of 5% – 10%! This result compared with only 22% of retail brokers indicating 10%+ growth, and 9% of retail respondents indicating growth in the 5%-10% range.
MarshBerry believes that P&C rate increases are driving these organic growth forecasts. In prior editions of Today’s ViewPoint, MarshBerry has articulated that the excess & surplus lines markets are experiencing rate increases of more than 10% annually, greater than in the standard lines marketplace. What we believe we are witnessing is sustained, or perhaps even accelerating, rate increases. These are likely driving buyer perceptions that rate increases should more than offset decreases in exposures from those industries which may have been harder hit by the pandemic. From a seller’s perspective, rate increases could help maximize sale proceeds tied to future revenue or earnings performance targets contained in a typical deal earn-out. One can conclude that both buyers and sellers are incentivized to transact in a rising rate environment. Sellers could achieve higher all-in sale proceeds while buyers gain additional revenues that offset fixed infrastructure costs. Conclusion: heightened M&A activity for specialty distribution in the second half of 2020 may surprise many an onlooker!
If you have questions about Today’s ViewPoint, or about activity in the M&A marketplace, please email or call Gerard Vecchio, Senior Vice President, at 212.972.4886.
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MarshBerry defines a “Platform Transaction” as insurance brokerage firms for which an acquirer, post-acquisition, maintains operations (i.e. no material integration into an acquirer’s other operations) and attempts to grow the Platform both organically and via add-on acquisitions.
[2] Note: MarshBerry acted as financial advisor to Beacon Hill and Avant in their sales to Specialty Program Group.
