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MarshBerry: Record-High M&A Transactions and Valuations, Increased P/C Rates, & An Improved Economy Set the Stage for Agencies to Explore Options

Featuring Phil Trem, Vice President, Mergers & Acquisitions

Posted on 11 Apr 12

Over the past five years, we’ve checked in with the folks at MarshBerry to get their pulse on the state of our industry in terms of mergers and acquisitions, agency perpetuation and growth, and other key issues. Recently, we spoke with Phil Trem, Vice President, Mergers & Acquisitions, at MarshBerry about the record-high M&A transactions and agency valuations taking place, the impact the firming market is having on acquisitions, and where he and his colleagues believe this is all heading in the year to come. Headquartered in Ohio, MarshBerry is a privately held company that provides consulting services to the insurance industry, including sales management, perpetuation planning, business planning, mergers and acquisition services, information services, and more.

Phil joined MarshBerry in 2010, bringing with him a significant amount of experience in both operations and M&As in the business and technology consulting services arena. He is a key contributor to the success of the firm’s M&A services division, and is responsible for a wide variety of activities including mergers and acquisitions, business planning, ownership perpetuation, and financial consulting.  Phil is also a licensed attorney in the state of Ohio.

Annie George (AG): In the past we’ve covered the impact of the economy and the soft market on the insurance distribution space in terms of M&As, perpetuation, and agency growth. What are you seeing today in terms of the economy and our industry?

Phil Trem (PT): “During the last year, the economy as a whole has been improving and we’re seeing positive signs. The stock market is up; unemployment is on a steady decline, although not at the level it was prior to the 2008 financial crisis.

“On the industry side, in late 2011, early 2012, we began to see an upward movement in Commercial rates – which is a shift from what we experienced since 2003 where there was a steady decline in premium volume and a negative decline since 2006/2007. Agencies are now seeing the Commercial Lines market firming. This means that agency revenue will increase as long as accounts are renewed. Agencies should start seeing increased profitability assuming they don’t drastically increase their expense stream as revenues increase.

“In 2011, we also witnessed the second highest number of M&A insurance agency deals with U.S.-based targets in the last decade. We believe this will continue through 2012, with this year being a record year for transactions in the industry, not only in total deal count but also in record valuations paid. 2012 is a time for agencies to make decisions.”

AG: Why are all these mergers occurring?

PT: “There are a number of different factors driving this activity. Due to the downturn in the premium market, it was very difficult for an agency to organically grow. Therefore, some of the public brokers, private equity firms, and major national and regional brokers employed an acquisition strategy as part of their growth plan, along with acquiring leadership and production talent, and entering new geographies in the process.

“Additionally, during the soft market, private equity groups over the last 12 to 24 months invested significant amount of capital to enter the industry, anticipating the ability to catch the wave when rates firmed, which would automatically garner an increase in the value of their investment.

“We believe this flurry of M&A activity will continue in the short term, and it will be a seller’s market for those agencies that can show they can grow, have a quality production staff and strong leadership, and are in a good location. However, we do believe this M&A activity will peak by the end of 2012, early 2013.”

AG: How come you’re anticipating a peak in activity?

PT: “As the market begins to pick up and agencies are able to grow organically due to rising premiums, the major buying sectors – the public brokers, banks, private equity groups – will not have to acquire as much as they will no longer need acquisitions purely for growth. They will still buy for strategic reasons, such as entering new geographies and niches, obtaining strong leadership, etc., but the need for growth will not be as prevalent.

“What’s more, as the demand begins to shrink, buyers will begin to exercise more selectivity in their acquisition targets. We will see a decrease in the number of total deals and the purchase prices being paid.

“We’re still at the point where there is a tremendous amount of activity, with record high valuations, but at some point because of the change in the economy and in the premium market this activity will stall.”

AG: This year could be a turning point for agencies, then?

PT: “Yes. From a seller’s perspective, in addition to the high demand, there are also other reasons why an agency should consider selling. First, valuations today are at a 30-year high. It’s causing agencies that historically wouldn’t consider selling – that have continually reinvested in their agencies for internal perpetuation – to look at the marketplace. They owe it to themselves to explore this option, especially if this indeed is a peak in the market.

“In addition, sellers are looking at a pending change in the capital gains rate. The Bush tax cuts are set to expire, with the current rate of 15% returning back to 20% at the end of 2012. There is also a potential surcharge in the capital gains rate in the healthcare reform bill, therefore, it can go even higher than 20%. If I’m a 52-year-old agency owner and I know it’s going to be challenging to perpetuate my agency in the next 10 years if I haven’t reinvested properly, I may not be ready to sell right now. But if I know I’m going to sell in the next five years, based on where the multiples are today and what could happen with capital gains, I may decide this is the year to sell. It may make more sense to sell today than in five years. This is the internal conversation agency owners are having with themselves.”

Phil also explained that buyers when structuring their purchase agreements typically include a guaranteed amount to be paid and a contingent or potential earn-out based on certain growth hurdles being met by the sellers. Sellers could earn money on the purchase price based on their performance over one-to-three years of the post-closing transaction. During a soft market, it was a struggle for people to grow, so the buyers lowered the hurdles sellers would need to meet in order to obtain the earn-out. For example, an agency that sold last year may have a 0%-10% growth hurdle to obtain an earn-out. With the market firming, buyers will adjust those hurdles higher to 5-15% next year for sellers to obtain the same amount of earn-out money.

“Sellers are recognizing this,” said Phil. “They’re thinking, ‘I know where valuations are today. I know the rate of capital gains today. I know the hurdles for earn-out are fairly reasonable. What I don’t know is where this will all be in a year or so.’”

When looking at the multiples being paid, MarshBerry took a look at a number of factors. “Banks and public brokers have historically driven the valuations,” said Phil. “Prior to 2009, the banks’ offers were always higher, but after the financial crisis they pulled back, and the public brokers started paying more. In 2011, we began to also look at the types of targets each were acquiring: the platform agency vs. a roll-in that can be integrated into the buyer’s location or niche. The platform agencies are getting a higher valuation than a roll-in. We’re seeing 7 to 8 times EBITDA multiples on a guaranteed basis on platform agencies, and 5 to 7 times EBITDA multiples on a guaranteed basis for roll-ins.

AG: What is the bottom line for agencies?

PT: “Doing nothing is not option. As there continues to be consolidation, many agencies owned by baby boomers have to look hard at their businesses. Perpetuation is a struggle for many as they look at it as a single event, but it’s an ongoing process. If you’re not reinvesting in the next generation of talent and leadership, it will be hard to sustain the business. If there is a lack of leadership to take over and a gap in the quality of staff, owners may be forced to look at selling.

“What’s more, with additional capital and profitability coming as a result of a firmer market, what are agencies going to do with this additional income? Will they use the income to reinvest in the agency? Will they increase their personal wealth? Will they look to acquire?

“Now is the time for agencies to develop a reinvestment strategy, including a perpetuation plan, or an exit strategy. Keeping the status quo should not be an option.”

For more information about MarshBerry and its services, please visit: Or you can contact Phil at (440) 392-6547, or via email at