Insurance Brokers Offer Bright Spot in Slow M&A Market

Mergers may have slowed this year but the normally staid insurance sector is providing some relief.

Deals involving insurance brokers posted strong multiples this year. Onex Corp.agreed to buy USI in a deal valued at $2.3 billion. The seller was Goldman Sachs Capital Partners. KKR is buying Alliant Insurance Services, the nation’s largest specialty insurance brokerage firm, from the Blackstone Group. New Mountain Capital acquired AmWins in a $1.3 billion recap. And, earlier in the year, Brown & Brown completed their $395 million buy of Arrowhead General Insurance. (Spectrum Equity and JMI Equity sold their stake in Arrowhead).

All of the deals are valued at 10x to 12x EBITDA, says Christopher Hughes, a director with Merger & Acquisition Services, a New York advisory boutique that focuses on insurance sector. These hefty multiples bode well for middle market transactions involving brokers. “These larger deals have increased the pricing for middle market agencies,” Hughes says. “Instead of 5.5x or 6x multiples, we’re now seeing multiples of 7x or even higher for quality middle market agencies.”

Hughes credits the low interest rate environment as having helped brokers. Also, Hurricane Sandy has caused the coastal property market in the Northeast to harden, while overall market conditions have been firming over the past year, Hughes says. “This is generally good for insurance agencies in that they do not have the underwriting risk, but do benefit from higher premiums being charged by the carriers,” he says.

This group of insurance deals also came from PE investments made during the 2005 to 2007 time period, Hughes says. For example, Goldman Sachs Capital Partners acquired USI in 2007 and invested up to $453 million cash in the deal. In 2005, Parthenon Capital Partners acquired a majority stake in AmWins. Blackstone invested in Alliant in 2007, putting in a reported $1.1 billion. And, Spectrum Equity invested in Arrowhead in 2006.

Hughes expects more insurance deals in 2013 and early 2014. The most likely candidate to sell? HUB International, a Chicago-based insurance broker, that Apax Partners acquired in 2007. Hub will likely go on the auction block in 2013 or go public, he says. “Their first preference would be to go public,” Hughes says. “They’ll get a higher valuation in the public market in an IPO than with a strategic buyer.”

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