GPs grow big insurance platforms through small acquisitions

With at least two insurance brokerage platforms changing hands so far in the second half of 2015, private equity firms set the stage for continued consolidation with the possibility of big exits down the road.

Despite high deal prices chilling the overall buyout industry, the model of acquiring property and casualty insurance, and other insurance brokers remains compelling.

“Local or niche industry insurance brokers often have sticky books of business based on strong personal relationships,” said Will Shields, partner, Ropes & Gray, a specialist in the space. “Putting them together can enhance product offerings to customers to provide a better strategic mix, or, in some cases, simply offer the cost savings typical of classic roll-up style businesses.”

The local insurance broker — the guy who’d get to know customers by playing golf with them — still numbers in the thousands around the U.S., even after a consolidation push that dates back to the 1990s and before. At a time when average purchase price multiples of all deal types tip the scales at 10x EBITDA and higher, local insurance brokerage businesses may go for around 6x EBITDA to 8x EBITDA.

Firms build brokerage platforms by adding on numerous small brokers. A platform with solid growth can command a purchase price multiple of 12x EBITDA, one dealmaker said.

For now, big strategics have been doing roll-ups on their own by adding teams or quietly buying small shops, with no big acquisitions of sponsored platforms this year.

Aon, Marsh & Co, Willis Group, Arthur J Gallagher & Co, or Brown & Brown often draw mention as likely front runners for any big acquisitions of a sponsored platform. In 2013, Brown & Brown bought broker Beecher Carlson Holding, backed by AustinVentures , FSPM and others, in a deal valued at $360 million.

Meanwhile, a couple big platforms changed hands more recently between sponsors, plus a third acquisition of a stand-alone broker:

• Kelso & Co announced plans on October 20 to buy 18-year-old property & casualty and employee benefits insurance specialist Risk Strategies from Kohlberg & Co for an undisclosed sum.
• Apax Partners paid an undisclosed sum to buy AssuredPartners from GTCR in a deal that closed October 22.
• Odyssey Investment Partners paid an undisclosed sum to buy Integro Ltd, an international insurance brokerage and risk management firm. The deal closed on November 2.

In terms of add-on deals by sponsors, Hellman & Friedman’s Hub International led the pack buying at least 13 insurance agencies in the third quarter alone, while Abry Parters’ Confie Seguros platform purchased at least three as it continues to target the Hispanic market.

Ryan Clark, president of Genstar, said brokerages throw off solid amounts of cash, but owners need capital to expand. The firm owns Acrisure, an insurance brokerage business, and helped launch Confie Seguros with its current chairman, Mordy Rothberg and John Addeo, a long-time insurance executive who is now retired.

Addeo, a member of Genstar’s strategic advisory board, said acquisitions have been part of the business for decades since it’s harder to scale up just on winning new policy holders alone. In 1994, Addeo teamed up with Barney Mizel, a pioneer in brokerage consolidation, to launch USI, one of the first major build-ups in the space.

“Certainly, private equity firms have a keen interest in insurance distribution,” he said. “It’s a business that throws off significant cash flow every year. It has renewable revenue stream.”

More deals await

Looking ahead, big platforms are expected to continue growing organically and through add-ons, though exits may not come right away after the recent flurry of deals, observers said.

IPO exits remain an option. At least two brokers have already been public. Goldman Sachs took USI private in 2007; Madison Dearborn Partners bought out public shareholders of NFP Corp in 2013 for $1.3 billion.

Addeo said bigger consolidations await, or some companies may go public. Most of the big platforms changed hands only in the last two to three years, so large transactions may not happen right away, he said.

“[Big platforms] either have to be sold to a bigger strategic buyer, another private equity firm, or go into the public marketplace,” he said. “They could be ready to go public tomorrow morning for all I know. They’re building companies a bit more, then they’ll make a decision to exit.”

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