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Special Section Sponsored by Target Markets Program Administrators Association Riding the M&A Wave Abundance of cash presages a wave of mergers and acquisitions By Bob Bloss Flurries of merger and acquisition activity among property/casualty agencies tend to come in waves. Whenever the industry overall has an abundance of cash in its coffers—usually as the result of hard market conditions when premium income has risen—both buyers and sellers begin to look for opportunities to capitalize on transactions that will produce economies of scale, especially in anticipation of an oncoming soft market when organic growth seems improbable. The general thinking on the buyer’s side is, “Let’s spend the money now, while we have it, by merging with or acquiring a firm that complements our business.” On the seller’s side, the thinking is, “We’ve come off a good year, and our bottom line looks strong enough to attract the right buyer or merger partner.” Some participants in the program administration industry, as well as observers of the program business, believe that we are right now at the very beginning of one of those merger and acquisition waves. “I have not seen any hard statistics, but anecdotally I have observed some pressure on the property/casualty side that favors consolidation among agencies,” says Tom Upton, a director of Standard & Poor’s. “It makes sense for those in the agency business who want to step out to think of the current market as the time to do so. For those who want to consolidate through mergers, again the timing is propitious.” Damien Magarelli, also a director at S&P, says there has already been some significant merger and acquisition activity and points to Swiss Re and G.E. Solutions as an example. “There have also been some transfers of books of business going back and forth between companies.” Says Magarelli: “Some agencies, having come off a year when the industry experienced record earnings, might address the new soft market by seeking to expand either geographically or with new products and might be motivated to consider merger or acquisition. Some insurers might be considering buying up agencies based on commissions, fees and the cost of acquisition. Others, rather than acquisition or merger, might merely want to add program administrators to their distribution systems.” Magarelli says that companies considering acquisition should look at the earnings posture of the company being acquired, the distribution system, and the consistency of management integration and cultures. Opportunities abound Dean Carberry of Rattner Mackenzie, Ltd., a Target Markets member, says there are tremendous opportunities overall for program administrators in the new soft market. “Carriers’ margins are getting tighter,” he says, “and the ability for program administrators to diversify is being recognized. In addition, there is new capital that has come into the business, and in the soft market there will be more of a focus on consolidation.” Stephan Christiansen, a director of Conning Research and Consulting, agrees that the soft market will result in an increase in merger and acquisition activity, on both the carrier and producer sides of the property and casualty insurance business. “The industry showed considerably good earnings in 2006 and that, coupled with the new capital that has come into the business, will cause some consolidation. When there is an abundance of capital in the industry, there are usually three safety valves. One is stock buybacks for public companies. Another is increased dividends in mutual companies. And the third is mergers and acquisitions.” Kevin Donoghue, a managing director with Mystic Capital, also a Target Markets member, says that the new wave of merger and acquisition developments in the program administration arena has already begun. In 2005, he says, there were an estimated 10 deals involving program administrators and wholesale brokers. In 2006 there were about 20, and in 2007 he expects there to be more than 30. “There are potential pitfalls in the merger and purchase process of which both buyers and sellers should be aware,” he says. “First, acquiring companies should focus on the quality of underwriting of the company being acquired. The core of an insurance entity is its underwriting profitability. Second, consider the corporate structure of the company being considered for acquisition. And third, look at the strengths of the markets being offered by the company being acquired.” → |
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