Why Are Specialty Distributors Selling? Market Factors.

Video Transcription

Hello, I’m George Bucur, a director within MarshBerry’s financial advisory practice.

Serving specialty distributors such as MGA’s (managing general agent), MGU’s (managing general underwriter), wholesale brokers and program managers, we are bringing you episode three of a three-episode series focusing on why specialty distributors are going to the market and selling in record numbers. Episode one and two focused on, respectively, the political landscape and why that is causing firms to contemplate a transaction. Episode two focused on the operational characteristics and challenges that specialty distributors have. Today we’re going to focus on the overall market factors that are influencing specialty distributors to contemplate M&A (Mergers & Acquisitions) transactions.

Now specifically, the overall valuation environment is at a historical high. If we look back over the last 10 years, valuations that we’re seeing have gone up around 60%. This historically high trend has forced some to contemplate transactions when otherwise they would not have done so.

Further, we have the tightening rate environment that is prevalent and has been for the last almost two years now. That rate environment is expected to continue tightening over the next year. And what does this mean for a transaction? Well, one, a firm may want to go through a transaction to partner with a firm that might have more clout with carriers that can help them get over some of their capacity constraints that the tightening environment is presenting.

In addition, however, one of the key deal elements of most transactions is the concept of an earn out. And that earn out represents additional consideration a seller could receive over a period of time based off of growth, traditionally, of revenue and/or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Now when we take that into consideration with the tightening rate environment, implying insurance pricing is increasing, that means that that firm is likely to receive more bottom-line profitability from that increasing commission revenue from the carriers. That means a firm may be better positioned to maximize their earn out. That again, those are reasons why specialty distributors are contemplating transactions in this unique environment.

Thank you for joining us for episode three of our three-part series that focuses on specialty distributors and why we are experiencing a record number of M&A transactions in 2020. If you think an M&A transaction might be right for you, feel free to reach out and we can have a conversation. We at MarshBerry like to say we help our clients to Learn, Improve, and Realize their value. We’ll see you next time.