The impact of the COVID-19 pandemic on insurance agency merger and acquisition activity is significant. A slowdown at the end of the first quarter continued into the second quarter. Principal drivers of the decline in activity have been the inability of buyers and sellers to meet in person, while at the same time wrestling with the uncertainty of the effect on revenue and profitability related to COVID-19.
The total number of U.S. and Canadian transactions involving property/casualty and benefits agents and brokers, managing general agents and third-party administrators during the first half of 2020 dropped 12% to 288, from 328 during the first half of 2019. On a quarterly basis, there were 126 transactions during the second quarter of 2020, down 22% from 162 reported in the first quarter of 2020, which is the lowest total since the fourth quarter of 2016. April and May were off by nearly half on a year-over-year basis, but there was a significant rebound in June, mostly a result of deals in progress put on hold in the early days of the pandemic.
The private equity-backed/hybrid buyer group, which includes firms with significant outside acquisition support, saw a modest 7% decline in activity from the 2019 first half to the 2020 first half, but was down 17% between the first and second quarter. Transactions by all other buyers were down 22% year over year, including significant reductions in the number of transactions completed in the second quarter vs. the first quarter, with the combined totals down 47% from 59 in the first quarter of 2020 to only 31 transactions in the second quarter.
Caledonia, Michigan-based Acrisure LLC completed the most transactions in the first six months of the year with 39, the same number completed in the same period in 2019. Columbus, Ohio-based Broadstreet Partners Inc. was second with 30 transactions, up from 17 in the 2019 period, followed by Chicago-based Hub International Ltd., which completed 19 transactions, down from 26, and Lake Mary, Florida-based AssuredPartners Inc. also with 19 transactions, down from 20. Tinton Falls, New Jersey-based World Insurance Associates LLC rounded out the Top 5 with 12 transactions in 2020, compared with eight during the first half of 2019.
Several other historically active buyers saw their transaction count drop substantially through six months in 2020. Daytona Beach, Florida-based Brown & Brown Inc. declined from 11 to seven, Deerfield, Illinois-based Alera Group Inc. decreased from 11 to five, and NFP Corp. dropped from nine to two.
The second quarter of 2020 saw only one large M&A transaction with the combining of Oak Hill Capital Partners’ EPIC Insurance Brokers & Consultants with The Carlyle Group’s wholesaler and managing general agent JenCap Holdings LLC under a new holding company, Galway Insurance Holdings LLC. There was one new private equity investment, with Memphis, Tennessee-based Sunstar Insurance Group LLC being acquired by BBH Capital Partners in June.
Previously in 2020, the major acquisition announcements included:
• Aon PLC, No. 2 in Business Insurance’s ranking, agreed to acquire No. 3 ranked Willis Towers Watson PLC, with an anticipated closing in early 2021.
• AssuredPartners Inc. acquired 2019 No. 58-ranked LMC Insurance and Risk Management of Des Moines, Iowa, in February 2020.
• Marsh & McLennan Agency acquired 2019 No. 35-ranked Assurance Agency of Schaumburg, Illinois, effective April 1, 2020.
Given the continued uncertainty around the COVID-19 pandemic, it is unclear whether the drop in M&A activity will be a one-off blip in the long-term growth of agency acquisitions, or if this will change the course that we’ve seen over the past 10+ years. Minimally, we anticipate some pullback in the up-front guaranteed financial consideration as buyers attempt to manage the risk with the potential revenue decline associated with the business slowdowns due to COVID-19, likely with a shift to more consideration in the back-end earnouts.
We also expect to see lower third-quarter 2020 M&A activity continuing into the fourth quarter as the country struggles with the safe reopening of the economy. Buyers and sellers will likely continue their courtships remotely with most unwilling to finalize the transaction until they are able to meet. Video conferencing has helped to bridge the process, but it is not a substitute for the direct face-to-face meeting.
Timothy J. Cunningham, Daniel P. Menzer and Steven E. Germundson are principals at OPTIS Partners LLC, a Chicago-based investment banking and financial consulting firm that serves the insurance distribution sector. Mr. Cunningham can be reached at [email protected] or 312-235-0081; Mr. Menzer can be reached at [email protected] or 630-520-0490 and Mr. Germundson can be reached at [email protected] or 612-718-0598.
