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Pandemic slows insurance M&A activity, though deals still flowing

BY Sunday, August 30, 2020 05:54pm

Since forming two years ago, High Street Insurance Partners Inc. grew steadily through acquisitions.

The Traverse City-based company acquired 13 insurance brokers and agencies in Michigan, Pennsylvania and New York. Six of those deals came in 2020 and were in the M&A pipeline before the COVID-19 pandemic hit this past spring.

As the industry consolidation that’s been occurring for several years eases amid the pandemic, High Street Insurance Partners has seen no lack of opportunity to buy.

High Street has a “very robust pipeline in the next few months as well,” with five more deals now under letter of intent that could close this fall, said High Street CEO Scott Wick, who formed the company in 2018 with Detroit-based private equity firm Huron Capital.

“We feel very good about what we’ve been able to build in two years here,” Wick said. “We’re opportunistic and we continue to have a nice organic strategy with our partners introducing us to other potential partnerships, and so we feel very good about where things are going and how things are progressing with our pipeline. It’s as full as it’s been.”

Deals slowed overall

High Street pursues its M&A strategy this year in a softer environment, although deal flow through the first half of 2020 was still higher than four years ago.

Optis Partners LLC, a Chicago-based firm that tracks M&A in the industry, counted 288 transactions in the first half of 2020, a decline from the 328 in the first six months of 2019.

The second quarter alone had 126 closed transactions, the lowest deal volume since the fourth quarter of 2016 “as the COVID-19 pandemic creates uncertainty in the marketplace,” according to Optis Partners.

The firm noted in a recent report on the second quarter that transactions “continued to be closed” despite the COVID-19 pandemic, although “a number of buyers dramatically slowed their M&A activity due to travel and meeting limitations and concerns over the certainty of revenue projections.”

“We anticipate the slowdown in M&A activity to continue at least through the third quarter and possibly beyond until there is more certainty of the impact from COVID-19 and buyers can rebuild their M&A inventory,” according to the Optis Partners report.

Even with the uncertainty over the economy, some acquirers in the industry are now beginning to return to the market, said Optis Partners Managing Director Tim Cunningham.

He expects lower deal flow in the second half of the year and a “bit of a flight to quality” among active acquirers, he said.

“Things have slowed down a bit. My experience now is the active buyers have gotten back in the game and I think they’ve become a little more selective at what they’re looking at,” Cunningham said. “There was always a robust market for the ‘A’ firms and the ‘B’ firms. I think because of the activity pre-COVID the ‘C’ firms were getting good valuation. The ‘C’ firms may not see that there is as much interest or that the valuations are going to be where they were before.”

If a seller has not been inordinately affected by COVID or the economy — and does not have high exposure to industries hit hard by the pandemic, such as hospitality — valuations “are going to stay kind of close to where they were,” Cunningham said. 

Deal terms also could include more use of earnouts, he said.

Attention shifts to insurance

Many of the top acquirers today are backed by private equity, which has been attracted to the brokerage industry by its predictable cash flows, reliable earnings, and “it doesn’t require any capital expenditures,” Cunningham said.

“The private equity world has really fallen in love with insurance distribution,” he said.

Cunningham estimates 25 to 50 private equity firms in the U.S. are now involved in acquiring insurance brokers. Aging Baby Boomers who want to sell and retire are also driving M&A activity, he said.

Grand Rapids-based Acrisure LLC remains by far the largest acquirer in the industry. Acrisure closed 39 deals in the first half of 2020, according to Optis Partners.

Since 2016, Acrisure closed on 393 acquisitions. The next largest acquirer in the same period was Columbus, Ohio-based Broadstreet Partners at 157 acquisitions.

Most recently, Acrisure last month bought the insurance practice of Tulco LLC, a Pittsburgh-based provider of artificial intelligence and machine-learning technology. The $400 million deal followed a year-long partnership between Acrisure and Tulco and the formation of Altway Insurance, an AI-backed insurance brokerage initially focused on individual health benefits.

In Grand Rapids, Brown & Brown of Michigan Inc. — a subsidiary of Daytona, Fla.-based Brown & Brown Inc. — acquired substantially all of the assets of insurance agency Buiten & Associates LLC. Buiten & Associates continues operating its office in Grand Rapids under the leadership of Paul Buiten, who said this month the sale to Brown & Brown was “the best cultural and strategic fit for our agency.”

High Street most recently acquired Capital Insurance Group in Bloomfield Hills. That deal followed the acquisition of two agencies in Upstate New York: Boonville, N.Y.-based Tall Pines Insurance, and the book of business from a Verona Beach, N.Y. agency.

Locally, the firm a year ago acquired Ottawa Kent Insurance Agency Inc., which has offices in Jenison, Sparta, Holland and Byron Center.

Looking for a peer group

High Street has not experienced a slowdown in prospective sellers in the market, Wick said. He believes the economic conditions resulting from the COVID-19 pandemic may actually lead to more sellers that want to partner with a large firm.

“In fact, I think because of what’s happening in the environment that we find a number of these potential partnerships or new partners are looking for a peer group and they’re looking for somebody to help them make sure they can get through the marketplace that exists today,” Wick said. “So, as a result of that, I think we’re having more conversations than we’ve had before. People are looking for help and they’re looking for guidance and they’re looking for a peer group to bounce ideas and thoughts and new ways to continue to help their clients.”

High Street seeks to acquire mature brokerages and agencies whose owners and management teams will stay with the firm and manage the business locally. High Street then consolidates backroom administrative functions and provides the acquired agency more resources and “deeper bench strength,” Wick said.

As High Street continues down the M&A path, it intends to remain selective in the firms it buys, he said.

“We’re going to be selective and continue to be disciplined in our approach,” Wick said. “It’s not something that we feel we need to do. We’re not in a hurry-up phase, we continue to be selective and we continue to find the right partners from a cultural fit that have a target customer very similar to the entire peer group as we do. That’s been a great recipe and we’re not in a rush.”

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