Merger & Acquisitions: Pitfalls of the Process

Report
An Investment Bank Serving the Insurance Industry
Presented by:
Lorna Gunnersen, Director
www.mysticcapital.com
New York
London
Denver
Presented to:
Independent Insurance Agents of Dallas
January 15, 2015
Charlotte
Services:
Locations:
-
Mergers & Acquisitions Advisory Services
Due Diligence
Valuation Support Services
Expert Witness
Strategic Consulting
Perpetuation Planning
New York, NY
London, UK
Charlotte, NC
Denver, CO
2
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Founded in October 2001 by three former
employees of The Hartford Financial Services
Group, Inc.

Firm professionals have prior experience at Big 4
accounting firms, large investment banks, and
insurance brokers (KPMG, Deloitte, Ernst & Young,
PricewaterhouseCoopers, Merrill Lynch, and
Benfield Group), and

Professional designations of employees include
Certified Public Accountant (CPA), Chartered
Property Casualty Underwriter (CPCU), Certified
Insurance Counselor (CIC), Certified Valuation
Analyst (CVA), and Chartered Financial Analyst
(CFA).
3
Clients include:
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Insurance Agents & Brokers,
Insurance Companies,
Program Administrators,
Managing General Agents (MGA’s),
Managing General Underwriters (MGU’s),
Third Party Claims Administrators (TPA’s),
Insurance Wholesale Agents,
Financial Institutions, and
Private Equity Groups
4
Experienced Professionals:
 Advised on over 180 insurancerelated transactions since firm
inception (source: SNL Financial)
with an aggregate transaction
value in excess of $2 billion
 Consistently ranked among top 3
financial advisors in the U.S.
insurance industry in terms of
completed transactions
 Know the current acquisition
environment through current
advisory engagements and
constant discussion with active
industry participants
 Advising on numerous
transactions in advanced deal
stages throughout the U.S. and
internationally
TOP FINANCIAL ADVISORS IN US INSURANCE
2008-2013
Source: SNL Financial
Firm
Marsh, Berry & Company, Inc.
Dowling Hales
Mystic Capital Advisors Group, LLC
Reagan Consulting, Inc.
Bank of America Merrill Lynch
Merger & Acquisition Services, Inc.
Macquarie Capital (USA) Inc.
Goldman, Sachs & Co.
Morgan Stanley
Keefe, Bruyette & Woods
2008-2013
# of Deals
216
135
88
71
53
47
50
44
38
38
Reported
Transaction
Value (USD)
714
430
379
248
51,083
468
13,116
61,678
3,801
3,801
*It should be noted that not all transactions are publicly reported. In addition, many reported
transaction do not disclose transaction value

The M&A market is currently robust as there are more positive factors driving
M&A, than negative factors hindering it
Driving Factors
Seller’s Market, Multiples are Up
Cash at Close and Guarantees are up
Uncertainty of Future
# of Brokers/ Fragmentation of Industry
Low Organic Growth / Soft Market
Artificially Low Interest Rates/ Cheap Debt
Active Private Equity Buyers
Aging Ownership of Agencies
Hindering Factors
Economic “Recovery”
Regulatory Uncertainty/ Political Risk
Post Financial Crisis Risk Aversion
Uncertainty of Future/ Fear of Giving Up
Control
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A Large number of
transactions were completed in
4th Quarter 2012, driven by
change in capital gains
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1st Quarter 2013 was slow due
to front loading of transactions
in 4th Quarter 2012
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Number of deals steadily
increased throughout 2013 and
has remained steady through
2014
U.S. Insurance Brokerage M&A
Source: SNL Financial
U.S. Insurance Brokerage M&A
Source: SNL Financial
100 Largest Brokers of U.S. Business
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Industry is extremely fragmented
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The number of independent agencies in the
U.S. is approximately 38,500 per the
Independent Insurance Agents & Brokers of
America
100th ranked broker had $23.6 million in
annual revenue in 2013, therefore 99.7% of
the firms in brokerage are outside of top 100
Lots of targets
Aon, PLC
Marsh & McLennan Cos., Inc.
Arthur J. Gallagher & Co.
Willis Group Holdings, PLC
BB&T Insurance Holdings, Inc.
Brown & Brown, Inc.
Wells Fargo Insurance Services
Lockton Cos., LLC
USI Holdings Corp.
Hub International Ltd.
National Financial Partners
Alliant Insurance Services
AssuredPartners, Inc.
Jardine Lloyd Thompson Group, PLC
Leavitt Group
97
99
NR
100
M.J.Insurance, Inc.
Murray Securus
Ansay & Associates
Rich & Cartmill
% change
4.6%
5.2%
10.7%
7.3%
6.9%
14.0%
-14.3%
12.4%
9.8%
21.5%
-0.3%
8.6%
46.8%
97.6%
13.0%
…
97
98
99
100
1
2
3
4
6
7
5
8
10
11
9
12
14
22
15
2013 U.S. Broker
Revenue (USD)
5,561,106,600
5,521,500,000
2,111,340,000
1,743,840,000
1,582,443,400
1,355,502,535
1,350,022,000
826,448,280
782,207,827
768,865,200
741,974,806
546,944,009
345,794,848
242,642,000
202,642,000
…
For every firm purchased, the insurance
brokerage industry is great at regenerating
businesses as individuals and teams “peel
off” to start new agencies
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Company
…
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2013
Rank
…
Acquisition will continue to be a key factor
for growth for larger agencies
2014
Rank
…
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Source: Business Insurance
24,913,083
24,393,000
24,327,509
23,607,750
11.3%
10.3%
13.8%
8.2%
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After an extremely soft P&C marketplace
that ran from 2005 through 2011, market
rates in the P&C insurance industry
hardened in 2012 and 2013, but rate
growth has slowed to be nearly flat or no
increases in recent months of 2014
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Soft market places pressure on organic
growth for brokers
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M&A becomes critical to achieve growth
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The Health Insurance marketplace is the
exception as rates have continued to rise,
but conversely, insurance companies are
tightening belts and cutting commissions
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Private Equity Backed Brokers (e.g. Acrisure, HUB, USI,
AssuredPartners)
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HOT
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Publicly Traded Brokers (e.g. Aon, MMC, AJ Gallagher, Brown & Brown)
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Low organic growth
Soft market
Wall Street pressure to grow
Insurance Carriers (e.g. Markel, Argo, HIIG)
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Most active group
Strong capital markets
Light debt covenants
Strong history of success over past several years. Few have failed to make money
View acquiring distribution as a cheap way to grow premium if they can write business
Especially competitive with mono-line MGA and program business where they can bring on
underwriting talent and eliminate a layer of expense
Could also be a defensive measure to keep book
International Firms (e.g. JLT, Hyperion, BMS/Minova)
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For example, London brokers looking to access U.S. market and U.S. Brokers looking to enter
London market
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Regional and Local Brokers
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COOL
Still very active, but they need to work harder to distinguish
themselves
Small deals that they usually get are being gobbled up by the big
guys
Often have to resort to friendlier terms (higher commission to
producers, bonus plans, etc…)
Banks
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Steady decline in bank owned insurance agencies since mid-2000’s
Realization that banking and insurance brokerage cultures are
different
“Cross-sell” hard to realize
In capital preservation mode, handcuffed by stress testing
Likely to see continued divestiture
There are a group of banks (e.g. Wells Fargo, BB&T) that are
committed to the insurance brokerage space, but their insurance
brokers tend to run almost independently of the bank
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Size of deal
Earnings Before Interest Taxes Amortization & Depreciation
(EBITDA)
Asset vs. Stock
 C-Corp
 S-Corp, LLC, Personal Goodwill Transaction
 Over 80% of deals are asset deals, however, stock vs. asset is
less of an issue with larger transactions
Risk Profile of Deal
 Account concentration, carrier concentration, other
 Employment Agreements
 Sales Culture
 Age and Ability of Owners and/or Management Team
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 Management/Reputation
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% of Deal at Risk
 The more at risk to the seller, the higher the multiple needed
to entice seller
 More guaranteed, the lower the multiple
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Base Purchase Price
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What the seller would conservatively anticipate to receive after
the earn out period
 We typically assume 0% growth
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Guaranteed Purchase Price
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This is as it says, GUARANTEED, not dependent on
performance
 Typically is the amount paid at closing, but some deals have
future payments that are guaranteed
 No ability to “claw back”
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Potential Purchase Price
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“Upside”
Amount the seller could potentially realize based on future
performance
 May require significant growth
 The “Everything fell into place perfectly” price
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The percentage of consideration at close and the % guaranteed has gone up over the
past year
 Deals that were 50%-70% down at close have moved to 60%-80%
 This is a function of competitive market
 Makes it harder for the “little guys” (Regional and Local brokers) who need to work
harder to attract deals
▪ Network and build relationships so that when a seller is ready to pull trigger,
they think of you
▪ Sweeten terms (possible examples include maintaining a higher commission
rate for seller’s producers, ensure a softer transition for employees)
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Some groups are making a push to minimize or even eliminate earnouts altogether
 Mindset is “when we buy it, we own it”
 Don’t want seller focused on earnout, but rather goals of the acquirer
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There is still uncertainty in Employee Benefits marketplace, especially for small
accounts with ACA exposure
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Currently, the market is putting a significant discount on clients with less than 50
lives and there is even some discount in the 50 to 100 hundred live segment of the
marketplace
 Large group is viewed as the “best bet” and continues to attract similar multiples
as P&C
 Some acquirers have even gone as far as to segment the book of business when
making an offer
▪ For example, recently an offer was made where the small group was priced at
1.5x revenue and paid over three years based on retention of accounts, while
the large group offer was 2.5x revenue paid over one year
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Disclaimer: There is no “typical” deal and there are numerous risk factors that vary
greatly for all deals (asset vs. stock values may be materially different).
Type of Deal
Platform Agency- Mega Deals
Platform Agency- Regional or Niche Deal
Carrier Acquisition of Distribution
Fold-In Acquisition
Group Benefits Large Account
Group Benefits Small Account
Producer Hire/ Book of Business
Base Deal
9.0x-12.0x
7.5x-9.5x
7.5x-9.5x
6.0x-8.0x
7.0x-9.0x
4.0x-6.0x
5.0x-7.0x
EBITDA Multiple Range
Guaranteed
Potential Deal
8.0x-11.0x
10.0x-13.0x
5.5x-7.5x
10.0x-12.0x
5.5x-7.5x
10.0x-12.0x
4.0x-6.5x
6.5x-9.0x
5.0x-7.0x
8.0x-10.0x
2.0x-4.0x
5.0x-7.0x
4.0x-6.5x
6.0x-8.0x
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M&A environment will remain a sellers market until fundamentals change in the economy
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Availability of capital will likely create a more competitive market
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If the market changes, it could turn very quickly (think 2008 financial crisis)
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PE backed brokers are aggressively rushing to execute their strategy before the market
turns (get to size, pay down debt, and get out)
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The impact of health care reform has yet to be truly understood and will continue to have a
significant effect on M&A, especially in small group
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Larger Brokers brokerages continue move down stream, putting pressure on regionals and
locals
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Carriers and International brokers will have an increased presence in M&A, as the U.S.
market is attractive
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Banks, credit unions will “stick to their knitting”

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