The past 13 months have been marked by
In the third quarter alone, Gallagher completed 12 acquisitions, and executives at the Rolling Meadows, Illinois-based insurance giant appear to have no plans to slow the pace. They said they have signed nonbinding term sheets with 45 potential sellers and have billions of dollars to deploy on additional merger-and-acquisition activity in 2024.
Many of its acquisitions have been what management described as "tuck-in" transactions involving relatively small stand-alone insurance agencies. But Gallagher has also struck several notable deals with banks.
In September, Gallagher announced plans to purchase Eastern Bankshares's insurance subsidiary for approximately
Earlier this month, Evans Bancorp
In a conference call with analysts last month, Patrick Gallagher, Gallagher's chairman, president and CEO, said tough competition has created a seller's market for insurance properties and that has spurred significant premiums being paid in these deals. For instance, the $904 million Gallagher paid Cadence — the second-largest bank-affiliated brokerage in the country — amounted to more than five times the insurance subsidy's trailing 12-months revenues. Similarly, the $2.1 billion-asset Evans' consideration amounted to about four times trailing 12-months revenue and nearly 20 times trailing 12-months earnings through Sept. 30. That made it too sweet a deal to pass on, said David Nasca, president and CEO of Evans.
"We were not valued anywhere near that kind of level on our own," Nasca said in an interview. "It only made sense to take advantage of this opportunity to redeploy capital in our core business."
Riding a rollup wave
Banks such as Cadence and Evans that have sold insurance assets in recent months have benefited from a decade-long trend of insurance firms pursuing rollup strategies, said Franklin Manchester, principal global insurance advisor for the Cary, North Carolina-based analytics software developer SAS. Both established players, such as Gallagher, Aon and Willis Towers Watson, along with newer competitors flush with venture capital cash have participated in the consolidation.
"It turns out owning insurance distribution is a great investment," Manchester said, referring to brokerages. "Well, what if you owned hundreds of them? Now, we start getting into why the A.J. Gallaghers of the world want to own that distribution."
The predictability of the insurance business has spurred buyers, such as Gallagher, to pay up for their acquisitions, Manchester said.
"Cash is king. You can pretty well forecast what you're going to get in from a revenue perspective on an annual basis because of the predictability of how people in businesses pay their insurance premiums. Because of that we were seeing historic levels of EBITDA multiples coming from those acquisitions."
All of the banks involved in these deals have sold insurance brokerages. A brokerage owns the customer relationship. They also command a sizable percentage of revenue from each sale, Adam Denninger, global industry leader for insurance at information technology consultant Capgemini, wrote in an email to American Banker. "It's evident that this is a remarkably high-margin business."
Gallagher has expressed satisfaction with its bank purchases, and management has indicated it is eager to do more deals. "We've had incredible success with our friends at M&T. We're very excited about Eastern and Cadence," Patrick Gallagher, the company's head, said on the conference call in late October. "Frankly, if there's other banks that are looking in that direction, we're a very good place to look."
The company has plenty of firepower. Chief Financial Officer Douglas Howell said on the conference call that Gallagher has $3.5 billion it can earmark for future deals "using only free cash and incremental borrowings."
Gallagher has 49,000 employees, does business in 130 countries and reported revenues of $2.5 billion for the three months ending Sept. 30. It has made the rollup strategy work by leveraging its scale and superior technology to boost the productive capacity of agencies it acquires.
At a smaller agency, "you're not going to be able to get the scale that you need to adopt technology for the things like general distribution…cross-selling, upselling," Manchester said. "Go from one point of distribution to 1,000, now you can talk about managing customer service from a decentralized call center…Those tools would not be available to that local agency at the scale they were dealing with in the individual markets. Now those [agents] can identify additional opportunities to drive revenue and market additional products."
All of this can be an attractive selling point for insurance brokerages, both inside and outside banks, that are contemplating an exit strategy. On the conference call, Patrick Gallagher noted agents at acquired agencies are able to compete for larger customer accounts.
"The bigger deals that are generating over $125,000 to $150,000 of commission are significantly greater today than they were five or 10 years ago," he said. "This is what we're giving them the opportunity to go after."
It seems as if former bank employees are also happy with their new arrangements. Bart Kresse, Gallagher's area president for Western New York, said the M&T Insurance Agency can serve clients of any size as part of Gallagher. "The synergies we've created between our local relationships and Gallagher's resources have really helped us grow our business," Kresse, who was the unit's president under M&T, said in an interview.
The deal also widened career opportunities available to individual agents, Kresse added. "When you're an insurance agency that is part of a bank, those opportunities just aren't as numerous. The opportunities are on the bank side, not necessarily on the insurance side."
Nasca is expecting a similar outcome for the Evans Agency. "This is an opportunity for [the Evans Agency] to land in a great organization that's going to give them the chance to be a formidable presence in Western New York and really fly," he said.
Reaching a peak
But the insurance M&A frenzy could soon come to an end, experts warned. Gallagher and other insurance consolidators were able to take advantage of historically low interest rates as they piled up acquisitions. Now, with rates substantially higher, the strategy will be more difficult to pursue.
"In my opinion, eight, nine, 10 times EBITDA is unsustainable because of what we're seeing with interest rates," Manchester said. "We're already starting to see mergers and acquisitions declining in the marketplace. They are kind of reaching their peak."
With the rapid, M&A-fueled growth that has characterized the last decade likely to cool off, insurance consolidators could pivot to expense control. Manchester predicts they will begin shedding less profitable distribution points, in much the same way banks have been scaling down the size of their branch networks.
"If you want to know what insurers are doing, look at what banks did 10 years ago," Manchester said.
Those are important considerations for banks that might still be interested in selling their insurance subsidiaries. For Cadence and Evans, however, the focus is on putting fresh capital to work.
Nasca is promising a "smorgasbord" approach. "This capital gives us the flexibility to look at acquisitions. It gives us the ability to look at share buybacks and investment restructures. There's all kinds of things we can do," Evans' CEO said.
