By James Graham
MARKET MOMENTUM: LET’S MAKE A DEAL
Amid the pandemic, M&A deals are a bright spot
If someone had told me back in April that at the end of 2020 we would be living through the hottest merger and acquisition (M&A) market on record in terms of both volume and pricing, I would have thought they were crazy. Against the backdrop of pain and disruption that COVID-19 has caused, it almost feels insensitive to share how good things are for large sections of the insurance distribution system. This industry has once again been stress-tested and has confirmed our belief that it is the best business in the world.
When the pandemic hit in March, the world was in a panic and many of our clients were projecting material revenue declines. The credit markets froze, and many M&A deals were delayed or closed with material price holdbacks. For a moment it felt as if we would relive a worse version of the 2008 financial crisis.
Thankfully the financial system was fundamentally strong, and the Federal Reserve and the federal government stepped up quickly and aggressively with historic monetary and fiscal programs that unjammed the credit markets and provided individuals and businesses much needed liquidity.
Record-low interest rates and ever-increasing demand for insurance brokers are leading to an increase in equity values even in the middle of a recession.
More important, the American spirit prevailed and people adapted. Businesses quickly changed their models to serve the stay-at-home economy, and scientists pooled their research to achieve new discoveries at record-breaking speed. The insurance industry also stepped up, with carriers providing financial relief to clients and with brokers serving as community resources for small businesses that were looking for best practices in a host of areas, from navigating new workers comp laws to devising work-from-home strategies. The innovation that has been spurred by the crisis is now fueling an economic recovery that is significantly stronger than many of us could have imagined.
The observations above may make it sound as if the worst is behind us or that the crisis is over. Sadly, we are still living through a pandemic and an economic recession, and when it will end is still uncertain. Now is not the time to step back and breathe a sigh of relief. Many sectors of the economy remain weak, unemployment is high, and the possibility of a double-dip recession is real. It is important for leaders of firms to consider their current position and performance and assess the risk profile of their current strategy. Insurance professionals are risk management experts; many owners, however, fail to assess the risk impact of their actions on their most valuable investment.
Owners should ask themselves two questions to help assess the risk of their current strategy in relation to their equity value and potential knock-on effects of the current crisis.
- Is my firm growing through this crisis, or are we merely circling the wagons and maintaining our current revenue position? Believe it or not, many top-performing firms are in growth mode. They have viewed this crisis as an opportunity to go after underserved accounts and prove their value to prospects. Many are hiring employees and using innovative methods to conduct business. If this doesn’t describe your firm, then its value is declining and the longer you wait to act, the higher your risk of losing a material amount of equity value.
- What effect does the capital that is flooding the insurance distribution system have on the value of my firm’s equity? It is hard to believe, but record-low interest rates and ever-increasing demand for insurance brokers are leading to an increase in equity values, even in the middle of a recession. For firms that are looking to mitigate their equity value risk, there has never been a better time to take some chips off the table. Firms are currently able to sell for historically high prices to buyers that have best-in-class capabilities and are growing through this crisis. Also, the equity growth of many well-capitalized buyers far exceeds the growth most independent firms could ever hope to achieve on their own.
The purpose of these two questions is to shine a light on what underperformance, excuses and inaction cost firm owners in terms of real value. If we do enter a double-dip recession, the opportunity to take advantage of the current state of the market could be lost. For far too many firms, the COVID-19 crisis is a scapegoat for decades of bad habits. For the top performers, it has been the catalyst to propel them to new heights.
James Graham is vice president of MarshBerry. Contact him at James.Graham@MarshBerry.com or (949) 272-0351.
As of September 30, 2020, 436 M&A transactions were announced in the United States. The market is continuing to keep pace with the hot deal activity we have seen in years past, with the total deal count year to date showing only a 2.9% decrease compared to the number of deals that were announced at this point last year.
Private capital-backed buyers remain at the forefront of this deal activity, completing 65.4% of all announced transactions. Independent firms accounted for 74 (17.0%) of the436 announced deals, which is consistent with the activity we have observed in this buyer segment so far in 2020. Additionally, public brokers and insurance companies have been responsible for 9.2% and 3.4% of the total deal count, respectively.
Notable Q3 activity
On September 17, State Farm Mutual Automobile Insurance Company agreed to acquire 100% of GAINSCO Inc.’s stock for $400 million in cash. GAINSCO is the holding company for MGA Insurance Company and specializes in minimum-limits personal auto insurance. The transaction is slated to close in early 2021, pending regulatory and shareholder approval, and marks State Farm’s first acquisition of an insurance company in its 98-year history.
On September 22, AssuredPartners Inc. announced its acquisition of People’s United Insurance Agency, Inc., from People’s United Bank for a reported $120 million. The purchase price reflects a 3.7x multiple of LTM revenue. This transaction represents an effort by People’s United Bank to focus resources on its core banking capabilities, in addition to monetizing its investment in PUIA.
Investment banking services offered through MarshBerry Capital, Inc., Member FINRA, Member SIPC and an affiliate of Marsh, Berry & Company, Inc. 28601 Chagrin Boulevard, Suite 400, Woodmere, Ohio 44122 (440.354.3230)
Disclosure: All deal count metrics are inclusive of completed deals with U.S. targets only. Scorecard year-to-date totals may change from month to month should an acquirer notify MarshBerry or the public of a prior acquisition. Statistics for 2020 are preliminary and may change in future publications. Please feel free to send announcements to M&A@MarshBerry.com.
Source: S&P Global Market Intelligence, www.insurancejournal.com, www.businessinsurance.com and other publicly available sources.