It’s been a bumpy ride for some, but overall, agency valuations seem to be steadily improving as the economy improves.
According to the Allstate Agency Value Index, an index developed and maintained by PPCLOAN, tracks sales prices and multiples of over 2000 Allstate agency sales over the last 14 years, the typical valuation has increased over the past year.
PPCLOAN is a finance company that specializes in providing financing for the purchase of established Allstate Insurance agencies nationwide. Over the past year, the average price to new/renewal commissions ratio, according to the Index, was 2.5x a marked increase from 2.3x commissions in the 1st quarter of 2013.
The general improvement in value multiples for independent agencies is confirmed in recent observations by Michael Mensch, CBI, M&AMI and Managing Partner of Agency Brokerage Consultants, an East Coast-based M&A advisor that specializes in facilitating the sale of independent insurance agencies.
“Just in the last 6 months, we have seen multiples climb by 10-15% with an improvement on the guaranteed amount (i.e. non-performance based portion) of the transaction value,” Mensch recently observed in his 2014 Insurance Brokerage M&A Outlook blog post from last January.
What’s driving the increase? First, there appears to have been a significant increase in the number of bidders with money. SNL Financial, which tracks independent agencies, reports the total number of transactions in 2013 reached 291 – exceeding the 2008 peak of 284 as many moved to sell their agencies and retire rather than continue to try to sell into an extremely shaky economy. Even the 284 number is almost certainly underreported.
Mensch attributes some of the increase in 2013 sales to the capital gains tax increase that went into effect on January 1, 2014–capital gainstaxes were set to go up increase, so many of those who planned to sell worked to complete the transaction before the end of the year.
But that’s only part of the story: There has been a substantial increase in private equity interest in purchasing successful agencies, as well. PE deals increased from 29 in 2008 to 98 in 2012, according to Agency Brokerage Consultants’ numbers. The number of PE-backed groups continues to increase on a regular basis. “We’re receiving calls once or twice a month from new buying groups with millions of funds behind them”, states Mensch. “It is an indication of the large amount of pent up capital and the increased confidence in the P&C market”, he continued.
Additionally, Mensch reports that the number of competitive bidders in some of his deals has increased by between 35 and 50 percent in the last year.
Another factor impacting agency valuations are low interest rates and a high availability of money. Interest rates have held at historically low rates for a few years. This makes it much more attractive for buyers to borrow money to make deals happen, and they have had more options for where to borrow money over the last 1-2 years as many lenders are gaining confidence in the overall economy. Mensch added, “I think we’re in a bit of a bubble. Multiples will come down once the Fed can no longer hold back interest rates. This will impact both the PE buyers and those borrowing funds for acquisitions because the cost of capital will go up and alternative investment options will provide better returns than they do currently.”
The market phenomenon is not lost on Paul Clarke, President & Chief Executive Officer of PPCLOAN, who noted that from the 2007 valuation peak to the trough, Allstate agency valuations only exhibited a decline of 17 percent. ““Contrast that with the volatility of stocks and bonds and mutual funds,” Clarke challenges.