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The Hales Report

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The Hales Report THE HALES REPORT 1270 Avenue of the Americas, Suite 930, New York, NY, 10020 | [email protected] Issue #7, Vol: 3 April 1, 2019 Inside This Issue U.S. Agency M&A On Track For Another Record. Impetus To Sell Now vs. Later? pg 1 A Decade of Market Share Movements In U.S. Commercial Lines. Notable Moves pg 6 Increased Broker Efficiency Highlighted By Rising Revenue Per Employee pg 8 Willis Towers Makes Largest Acquisition Since Merger, $1.2B For TRANZACT Pg 10 Lloyd’s Posts Another Loss, Expense Issues Remain (>30% Acquisition Ratio) pg 12 PG&E Faces $10.7B+ of Fire Subrogation From Underwriters & A Hedge Fund pg 14 The Private Flood Insurance Market Continues To Expand In 2019 pg 16 Hales Hits & Bindable Quotes pg 18 Hales Q1 Deal Diary & Broker Valuations pg 19 U.S. Agency M&A On Pace For Another Record Year. 1st Quarter 2019 Activity Marginally Higher vs. 2018. With the quarter coming to a close, 2019 appears on track to be at or near another record year for U.S. agency mergers & acquisitions. The total deal tally of 165 is higher than 139 in Q1:18 and is the largest first quarter on record, surpassing Q1:17. Note, while Q1 typically sees a fair share of deals (~ ¼ of deals over the past decade were completed during Q1) activity tends to be weighted more towards the back ½ and Q4 in particular (which has represented nearly ⅓ of all deal activity over the past decade). That said, it was a particularly active Q3:18 that helped 2018 eclipse 2017 as the most active year for U.S. agency M&A on record. Exhibit 1 U.S. Middle Market Agency Transactions By Quarter / Year 591 601 Q1 Q2 Q3 Q4 142 464 149 439 388 354 366 119 331 348 338 104 127 170 106 289 277 268 91 95 86 106 144 95 108 59 220 236 71 94 101 160 67 85 75 86 80 79 150 61 72 68 118 130 69 60 83 72 57 89 75 42 77 80 60 48 52 49 155 139 165 91 109 91 91 98 122 107 88 66 58 62 74 48 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: SNL(Preliminary), Factset, other public sources The Hales Report Contact: [email protected] Page 1 The trends remain supportive for further consolidation, and we would not be surprised if potential sellers shorten their time horizon / more seriously consider a transaction this year given: (i) increased talk of a recession, or at least some marginal decline in the U.S. growth rate later in 2019 / into 2020; (ii) the ongoing benefit to acquisition pricing/math from low(er) interest rates. While 6 months ago it was thought that interest rates would steadily increase, they have gone the other direction; and (iii) the looming threat of higher tax rates if Democrats, already energized by the mid-term 2018 election results, gain further power in 2020 (AOC’s 70% income tax bracket could be just the beginning). A Closer Look At The Trends … Looking at deals by acquirer type, to no surprise we see continued substantial involvement on the part of private equity (particularly advantaged by low interest rates given the greater use of debt leverage vs. strategic/public broker buyers). PE / PE backed brokers comprised 42% of deals in Q1 (marginally higher vs. 38% of deals in 2018). Public brokers were also incrementally more active, representing 36% of Q1 deals (vs. 35% in 2018). Acrisure represents a lower % of deals YTD as do banks. Exhibit 2 & 3 Q1:19 Broker Deals By Count (%) 2018 Broker Deals By Count (%) PE / PE Backed Bank PE / PE Backed Bank Acrisure Broker Acrisure Broker Other Other 2, 1% 20, 3% 70, 42% 16, 10% 227, 38% 100, 17% 18, 11% 59, 36% 42, 7% 212, 35% Source: SNL, Factset, Other Public Sources Source: SNL, Factset, Other Public Sources The Hales Report Contact: [email protected] Page 2 Looking at the # of deals by specific acquirer, newly formed Patriot Growth Insurance Services has the highest tally in Q1:19 (integrated 17 independent agents in January and 1 in February) followed closely by Acrisure already having acquired 16 domestic brokers (Acrisure completed 100 acquisitions in FY2018, see exhibit below). Notably, Broadstreet Partners reached 10 deals this quarter compared to 7 this time last year. Of the public firms, A.J. Gallagher ended the quarter with 9 acquisitions (above their 5 deals from this time a year ago). Brown & Brown follow closely with 8 acquisitions, marking B&B’s largest Q1 deal tally since 2011, and a big jump from only 2 acquisitions completed at this time last year (activity accelerated in the back ½ for B&B with 23 total deals in 2018, including its largest ever with Hays). Exhibit 4 Most Active Acquiring Brokers 2012 - Present (Domestic Deals) 2012 2013 2014 2015 2016 2017 2018 Q1-19 National Brokers Patriot Growth (PE) 18 Acrisure (Former PE) 4 5 14 56 64 92 100 16 Broadstreet Partners (PE) 2 3 16 19 36 30 10 AJG (Public) 51 26 47 36 29 26 32 9 Hub (PE) 25 20 25 29 29 42 28 9 AssuredPartners (PE) 27 20 23 24 24 23 33 8 Brown & Brown (Public) 13 4 7 12 6 11 23 8 Alera Group (PE) 22 16 28 2 Hilb Group (PE) 3 2 4 8 14 13 8 2 MMA (Public) 9 4 9 7 7 6 7 2 USI (PE) 13 6 11 6 10 8 4 2 Confie Seguros (PE) 22 14 13 19 16 6 5 0 Sub-Total 169 101 156 213 240 279 298 68 Other 197 135 232 226 224 312 303 97 Total Broker Deals 366 236 388 439 464 591 601 165 Source: SNL(Preliminary), Factset, and other public sources A Couple “Big Deals” … So far 2 of the Hales Top 100 brokers have been acquired this year: (i) #72 Bouchard Insurance, with ~$43M of revenue, was acquired by Marsh Agency; and (ii) #84 Tolman & Wiker, with ~$33M+ of revenue, was acquired by AssuredPartners. Marsh Agency also acquired Employee Benefits Group, putting their Q1 tally at 2 (versus 1 acquisition YOY). Marsh & McLennan has reiterated an ongoing commitment to the Marsh Agency strategy (albeit a bit more selective) amidst the acquisition & integration of #6 worldwide broker JLT (deal closed today, 4/1). The Hales Report Contact: [email protected] Page 3 Exhibit 5 Hales Top 25 U.S. Agents & Brokers Rank U.S. Revenue ($,M) '16 '17 Company 2016 2017 % Change Ownership Type 1 1 Marsh & McLennan $6,573 $6,870 4.5% Public 2 2 Aon PLC $3,981 $4,425 11.2% Public 3 3 Willis Towers Watson $3,395 $3,821 12.5% Public 4 4 Arthur J. Gallagher $2,945 $3,177 7.9% Public 5 5 Brown & Brown $1,749 $1,865 6.7% Public 6 6 BB&T Insurance $1,713 $1,754 2.4% Public 9 7 USI Insurance Svcs $1,049 $1,740 65.9% Private Equity 7 8 Hub International $1,281 $1,461 14.0% Private Equity 8 9 Lockton $1,055 $1,171 11.0% Private 11 10 Alliant Insurance Svcs $968 $1,125 16.2% Private Equity 12 11 NFP Corp. $930 $1,069 15.0% Private Equity 14 12 Acrisure LLC $649 $1,042 60.5% PE/ Management 13 13 AssuredPartners $834 $967 16.0% Private Equity 15 14 BroadStreet Partners $423 $481 13.6% Private Equity 17 15 Edgewood Partners / EPIC $245 $386 57.5% Private Equity 16 16 JLT (Marsh 9/18) $275 $365 32.7% Public 20 17 Integro (EPIC 12/17) $221 $347 57.1% Private Equity 19 18 CBIZ Benefits & Insurance Svcs $269 $286 6.3% Public 22 19 Risk Strategies $198 $238 20.2% Private Equity 18 20 Leavitt Group $225 $236 4.7% Private 21 21 Paychex Insurance Agency $171 $207 21.1% Public 23 22 Hays (B&B 10/22) $195 $199 2.1% Private 24 23 Insurance Office of America $181 $199 10.0% Private 26 24 Alera Group $158 $193 22.3% Private Equity 30 25 Digital Insurance $148 $190 28.3% Private Equity Other Notable Deals From The Top 100 25 Crystal & Co (Alliant 4/12) $150 Private 34 32 Regions (BB&T 4/18) $142 $145 2.2% Public 36 33 Wortham (Marsh 6/25) $128 $131 2.1% Private 59 55 Key Insurance (USI 3/29) $55 $60 9.1% Public 80 72 Bouchard Insurance (MMA 1/22) $40 $43 5.9% Private 91 84 Tolman & Wiker (AssuredPartners 2/15) $33 $33 0.0% Private Source Dowling Hales Pricing remains elevated, as highlighted in Exhibit 6, with peak pricing down marginally vs. the nearly 14x EBITDA we saw in 2018 (reflects some unique / large deals). Exhibit 6 Guaranteed Multiples 16.0 x EBITDA Minimum EBITDA Maximum 14.0 x 12.0 x 10.0 x 8.0 x 6.0 x 4.0 x Price of Entry 2.0 x 0.0 x 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Dowling Hales YTD The Hales Report Contact: [email protected] Page 4 ÿ ÿ ÿÿ ÿ ÿÿ !ÿ"#$%&'#() 0&12&'3$ÿ15ÿ'3)&"('ÿ'##1%#()$ÿ"6$ÿ$0)("'768ÿ0&12&'3ÿ2&1%09 @ABCDEÿ FBGHÿHGIPGQÿFHÿGRSBTHCPGÿUCDFDSCFBÿFQPCH@IÿV@ÿDHTIFDSGÿWI@EIFXHÿ@U X GICSFÿY`W abcÿFÿHdGSCFBVeÿXFDFECDEÿEGDGIFBÿFEGDSeÿFDQÿB@eQfH S@PGIg@BQGIcÿFDQÿCHhÿ QPCH@IHÿ@Uÿ X GICSFcÿFÿIGVFCBÿFEGDSeÿY` aÿFDQÿV@EGVgGIc VgGÿ`@XdFDCGHabcÿCDÿCVHÿHFBGÿV@ÿdGSCFBVeÿWI@EIFXÿI@TdcÿFÿQCPCHC@Dÿ@Uÿ Ti DVGIDFVC@DFBp qrstuvswxrwrtÿyÿ3syxstÿ57ÿyxÿsÿ sxryxrÿyrÿyÿ1wtÿrsÿxrÿ(syr wy rÿsÿy vwsrÿty xwyvxyÿsxwÿv rtÿÿ rysyrtÿyrÿ yxsyx s r ÿyvtyÿxr ÿwr xsvwsx ÿ rywÿyyÿsyyxyr ÿstÿsxysÿwrwx svx 9ÿ6rÿ(syr ÿswrÿrtÿÿ(5vtrw ÿ$xrsÿvwrÿstÿ(wy ÿqsrÿ yÿxyvrÿxÿrstÿxrÿrwsxyÿyxÿxrywÿrÿswxrw9 ÿ ÿ ÿ defghijkjflÿnifÿoppfifqÿkriohsrÿtnuflÿefghijkjflÿvvwxÿyfz{fiÿ|}~e}w ÿ ÿ ÿ 9tysr 9 ÿ'rvrÿÿxrÿ'rwys ÿ$vyxrÿÿ#rÿ8wÿ#8ÿ ÿ#9ÿ3yysÿ'rvrÿ$vyxrÿÿ(ysÿ"7ÿ Jockeying For Market Share: A Decade of Movements In The U.S.
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