Compared to 2012, the number of insurance agency mergers and acquisitions declined during the first half of this year, according to a recent report released by Chicago-based financial consulting firm OPTIS Partners, LLC. But the dip is not indicative of a thinning market.
OPTIS managing director Tim Cunningham, who prepared the analysis alongside senior partner Daniel Menzer, attributes the drop to the increase in federal capital gains tax from 15 to 20%between 2012 and 2013.
“You had a lot of sellers effecting a transaction in 2012 to avoid five points of tax,” Cunningham says, adding that some high-income individuals also wanted to avoid facing the additional 3.8% surtax implemented at the beginning of the new year. “The market has been fairly robust the last few years for both buyers and sellers, but here, we saw this surge at year-end.”
Analyzing data from press releases, the trade press and company websites, “Agent-Broker Mergers & Acquisitions: Relative Calm after the Perfect Storm” identified only 122 reported transactions in the United States and Canada during the first six months of 2013, compared to 133 during the same period in 2012.
The report says privately owned brokers have made 45 acquisitions in 2013, up from 40 last year, with private-equity-backed brokers remaining steady at 40 acquisitions. Mergers and acquisitions for publicly owned brokers, by contrast, fell from 30 to 18 between 2012 and 2013.
Noting that the results suggested no additional demographic differences, Cunningham attributes the public/private discrepancy to the same trend that caused the decline in numbers overall. “Publicly owned brokers did a lot of transactions in 2012,” he says. “It was just kind of a natural fall-off.”
According to the report, 2013 has seen 46 p-c agency sales and a notable 36 for employee benefits-only agencies, with 30 deals for agencies selling both products. In addition to the tax issue, employee benefits-focused agencies were also motivated by the imminent implementation of the Affordable Care Act, Cunningham says.
“It was a two-headed impact,” he explains. “Smaller firms realized they needed to affiliate with a larger organization to have some value-added resources. Buyers, on the other hand, were building out those value-added resources in an attempt to acquire scale.”
Although Cunningham does not anticipate a “groundswell” of mergers and acquisitions in the near future, he does expect a more gradual, natural uptick before the end of the year. “The pipeline was drained on Dec. 31,” he says. “Now, the inventory of sellers has to be rejuvenated. The firms who have been active on the acquisition side will continue to be active.”
Cunningham sees that trend as especially inevitable due to what he refers to as a “looming perpetuation cliff,” in which approximately one-third of all agency principals are expected to exit the business in the next 10 or 15 years. While there’s no one book of business that active buyers will be looking to acquire—“beauty is in the eye of the beholder,” Cunningham says—those heading over the cliff will leave plenty of room for new business.
“You’ve got a good climate and an active buying environment,” Cunningham says. “That means a lot of sellers that need to sell.”
Jacquelyn Connelly is IA assistant editor.