Valuations of independent insurance agencies in the mergers and acquisitions (M&A) market have been climbing for several years now. According to experts in the field, that situation is likely to continue.
Insurance industry consulting firm MarshBerry reported that average base purchase prices hit 10.37 times Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) in the third quarter of 2019. This was up from 8.95 at the same point in 2018 and 7.73 at that point in 2016. Maximum earn outs from sales transactions jumped to 13.73 times EBITDA from 11.56 in 2018 and 10.12 in 2016. That one-year difference translates to more than $1 million for an agency with EBITDA of $500,000.
The number of agency sales is also growing. The report showed 451 transactions (an average of 50 per month) through the first three quarters of 2019, up from 429 in 2018 and 334 in 2016.
Dan Menzer of M&A consultant OPTIS Partners expects this to continue. “We certainly don’t get the feeling there’s been any pull-back in multiples in recent months. It does seem like the competitive nature of the current market place is continuing to push the limits on pricing, even if only slightly beyond where they were 12-18 months ago.”
Economic conditions are a likely contributor to this trend. Menzer says that competition, low borrowing costs, a good economy and a favorable time in the insurance cycle are pushing up agency values. “All combined, there’s a lot of positive energy that supports the desire to get the deal at the ever increasing multiples we’re seeing.”
Marc Greene of General Insurance Brokerage, an M&A transactions broker based in Florida, gives more weight to the fundamentals, specifically the quality of an agency’s book of business. “Preferred books are worth the most,” he says.
M&A consultants are seeing valuations rise in all regions of the country. Greene says regional variations in values have narrowed over the last few years. “A good agency or book of business is worth the same on the east coast as the west coast.” Menzer does not see much variation at all, saying the “rising tide” in valuations is lifting agencies in all locations.
Location may still matter, however. “Rural agencies are typically worth less due to the smaller markets that they service,” Greene says. However, “If a rural agency has a large book of business, it could value along the same lines as a more urban agency.”
One factor fueling demand for insurance agencies is declining interest rates. The yield on the 10-year U.S. Treasury Note fell more than 42% in the last year, from 3.14% to 1.80%. The Federal Reserve reduced short-term interest rates twice in the third quarter of 2019, indicating that rates will be low and falling in the near time.
“Until rates move significantly higher,” Menzer says, “I don’t think there will be a significant impact on the buyer appetites or willingness to stretch their valuations.” Greene says that fluctuations in rates may affect valuations, but demand for agencies will remain strong regardless.
The MarshBerry report shows that private equity backed buyers have been the most active in the market. Of the 20 most active buyers in the first three quarters of 2019, 15 were private equity backed.
“The PE-backed buyers continue to attract new capital and new owners at multiples well in excess of what’s being paid for the individual agencies,” Menzer says, “so the EBITDA multiple arbitrage is still justifying the valuations of the individual sellers. When that changes, because the PE-backers don’t feel they can generate the (return on investment) needed for their investors, I think we’ll start to see some degree of slow-down or pull-back in the multiples.”
Nothing lasts forever; the hot market for insurance agencies will eventually cool. That day may not come soon, though. “It will happen at some point, but whether it’s within the next 6-12 months, probably more unlikely than likely,” says Menzer. Greene shares that forecast. “M&A activity is robust and the future appears to be steady as well.”
This can only be good news for agency owners contemplating a sale in the near future.