An Investment Bank Serving the Insurance Industry Presented by: Lorna Gunnersen, Director www.mysticcapital.com New York London Denver Presented to: Independent Insurance Agents of Dallas January 15, 2015 Charlotte Services: Locations: - Mergers & Acquisitions Advisory Services Due Diligence Valuation Support Services Expert Witness Strategic Consulting Perpetuation Planning New York, NY London, UK Charlotte, NC Denver, CO 2 Founded in October 2001 by three former employees of The Hartford Financial Services Group, Inc. Firm professionals have prior experience at Big 4 accounting firms, large investment banks, and insurance brokers (KPMG, Deloitte, Ernst & Young, PricewaterhouseCoopers, Merrill Lynch, and Benfield Group), and Professional designations of employees include Certified Public Accountant (CPA), Chartered Property Casualty Underwriter (CPCU), Certified Insurance Counselor (CIC), Certified Valuation Analyst (CVA), and Chartered Financial Analyst (CFA). 3 Clients include: Insurance Agents & Brokers, Insurance Companies, Program Administrators, Managing General Agents (MGA’s), Managing General Underwriters (MGU’s), Third Party Claims Administrators (TPA’s), Insurance Wholesale Agents, Financial Institutions, and Private Equity Groups 4 Experienced Professionals: Advised on over 180 insurancerelated transactions since firm inception (source: SNL Financial) with an aggregate transaction value in excess of $2 billion Consistently ranked among top 3 financial advisors in the U.S. insurance industry in terms of completed transactions Know the current acquisition environment through current advisory engagements and constant discussion with active industry participants Advising on numerous transactions in advanced deal stages throughout the U.S. and internationally TOP FINANCIAL ADVISORS IN US INSURANCE 2008-2013 Source: SNL Financial Firm Marsh, Berry & Company, Inc. Dowling Hales Mystic Capital Advisors Group, LLC Reagan Consulting, Inc. Bank of America Merrill Lynch Merger & Acquisition Services, Inc. Macquarie Capital (USA) Inc. Goldman, Sachs & Co. Morgan Stanley Keefe, Bruyette & Woods 2008-2013 # of Deals 216 135 88 71 53 47 50 44 38 38 Reported Transaction Value (USD) 714 430 379 248 51,083 468 13,116 61,678 3,801 3,801 *It should be noted that not all transactions are publicly reported. In addition, many reported transaction do not disclose transaction value The M&A market is currently robust as there are more positive factors driving M&A, than negative factors hindering it Driving Factors Seller’s Market, Multiples are Up Cash at Close and Guarantees are up Uncertainty of Future # of Brokers/ Fragmentation of Industry Low Organic Growth / Soft Market Artificially Low Interest Rates/ Cheap Debt Active Private Equity Buyers Aging Ownership of Agencies Hindering Factors Economic “Recovery” Regulatory Uncertainty/ Political Risk Post Financial Crisis Risk Aversion Uncertainty of Future/ Fear of Giving Up Control A Large number of transactions were completed in 4th Quarter 2012, driven by change in capital gains 1st Quarter 2013 was slow due to front loading of transactions in 4th Quarter 2012 Number of deals steadily increased throughout 2013 and has remained steady through 2014 U.S. Insurance Brokerage M&A Source: SNL Financial U.S. Insurance Brokerage M&A Source: SNL Financial 100 Largest Brokers of U.S. Business Industry is extremely fragmented The number of independent agencies in the U.S. is approximately 38,500 per the Independent Insurance Agents & Brokers of America 100th ranked broker had $23.6 million in annual revenue in 2013, therefore 99.7% of the firms in brokerage are outside of top 100 Lots of targets Aon, PLC Marsh & McLennan Cos., Inc. Arthur J. Gallagher & Co. Willis Group Holdings, PLC BB&T Insurance Holdings, Inc. Brown & Brown, Inc. Wells Fargo Insurance Services Lockton Cos., LLC USI Holdings Corp. Hub International Ltd. National Financial Partners Alliant Insurance Services AssuredPartners, Inc. Jardine Lloyd Thompson Group, PLC Leavitt Group 97 99 NR 100 M.J.Insurance, Inc. Murray Securus Ansay & Associates Rich & Cartmill % change 4.6% 5.2% 10.7% 7.3% 6.9% 14.0% -14.3% 12.4% 9.8% 21.5% -0.3% 8.6% 46.8% 97.6% 13.0% … 97 98 99 100 1 2 3 4 6 7 5 8 10 11 9 12 14 22 15 2013 U.S. Broker Revenue (USD) 5,561,106,600 5,521,500,000 2,111,340,000 1,743,840,000 1,582,443,400 1,355,502,535 1,350,022,000 826,448,280 782,207,827 768,865,200 741,974,806 546,944,009 345,794,848 242,642,000 202,642,000 … For every firm purchased, the insurance brokerage industry is great at regenerating businesses as individuals and teams “peel off” to start new agencies 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Company … 2013 Rank … Acquisition will continue to be a key factor for growth for larger agencies 2014 Rank … Source: Business Insurance 24,913,083 24,393,000 24,327,509 23,607,750 11.3% 10.3% 13.8% 8.2% After an extremely soft P&C marketplace that ran from 2005 through 2011, market rates in the P&C insurance industry hardened in 2012 and 2013, but rate growth has slowed to be nearly flat or no increases in recent months of 2014 Soft market places pressure on organic growth for brokers M&A becomes critical to achieve growth The Health Insurance marketplace is the exception as rates have continued to rise, but conversely, insurance companies are tightening belts and cutting commissions Private Equity Backed Brokers (e.g. Acrisure, HUB, USI, AssuredPartners) HOT Publicly Traded Brokers (e.g. Aon, MMC, AJ Gallagher, Brown & Brown) Low organic growth Soft market Wall Street pressure to grow Insurance Carriers (e.g. Markel, Argo, HIIG) Most active group Strong capital markets Light debt covenants Strong history of success over past several years. Few have failed to make money View acquiring distribution as a cheap way to grow premium if they can write business Especially competitive with mono-line MGA and program business where they can bring on underwriting talent and eliminate a layer of expense Could also be a defensive measure to keep book International Firms (e.g. JLT, Hyperion, BMS/Minova) For example, London brokers looking to access U.S. market and U.S. Brokers looking to enter London market Regional and Local Brokers COOL Still very active, but they need to work harder to distinguish themselves Small deals that they usually get are being gobbled up by the big guys Often have to resort to friendlier terms (higher commission to producers, bonus plans, etc…) Banks Steady decline in bank owned insurance agencies since mid-2000’s Realization that banking and insurance brokerage cultures are different “Cross-sell” hard to realize In capital preservation mode, handcuffed by stress testing Likely to see continued divestiture There are a group of banks (e.g. Wells Fargo, BB&T) that are committed to the insurance brokerage space, but their insurance brokers tend to run almost independently of the bank Size of deal Earnings Before Interest Taxes Amortization & Depreciation (EBITDA) Asset vs. Stock C-Corp S-Corp, LLC, Personal Goodwill Transaction Over 80% of deals are asset deals, however, stock vs. asset is less of an issue with larger transactions Risk Profile of Deal Account concentration, carrier concentration, other Employment Agreements Sales Culture Age and Ability of Owners and/or Management Team Management/Reputation % of Deal at Risk The more at risk to the seller, the higher the multiple needed to entice seller More guaranteed, the lower the multiple Base Purchase Price What the seller would conservatively anticipate to receive after the earn out period We typically assume 0% growth Guaranteed Purchase Price This is as it says, GUARANTEED, not dependent on performance Typically is the amount paid at closing, but some deals have future payments that are guaranteed No ability to “claw back” Potential Purchase Price “Upside” Amount the seller could potentially realize based on future performance May require significant growth The “Everything fell into place perfectly” price The percentage of consideration at close and the % guaranteed has gone up over the past year Deals that were 50%-70% down at close have moved to 60%-80% This is a function of competitive market Makes it harder for the “little guys” (Regional and Local brokers) who need to work harder to attract deals ▪ Network and build relationships so that when a seller is ready to pull trigger, they think of you ▪ Sweeten terms (possible examples include maintaining a higher commission rate for seller’s producers, ensure a softer transition for employees) Some groups are making a push to minimize or even eliminate earnouts altogether Mindset is “when we buy it, we own it” Don’t want seller focused on earnout, but rather goals of the acquirer There is still uncertainty in Employee Benefits marketplace, especially for small accounts with ACA exposure Currently, the market is putting a significant discount on clients with less than 50 lives and there is even some discount in the 50 to 100 hundred live segment of the marketplace Large group is viewed as the “best bet” and continues to attract similar multiples as P&C Some acquirers have even gone as far as to segment the book of business when making an offer ▪ For example, recently an offer was made where the small group was priced at 1.5x revenue and paid over three years based on retention of accounts, while the large group offer was 2.5x revenue paid over one year Disclaimer: There is no “typical” deal and there are numerous risk factors that vary greatly for all deals (asset vs. stock values may be materially different). Type of Deal Platform Agency- Mega Deals Platform Agency- Regional or Niche Deal Carrier Acquisition of Distribution Fold-In Acquisition Group Benefits Large Account Group Benefits Small Account Producer Hire/ Book of Business Base Deal 9.0x-12.0x 7.5x-9.5x 7.5x-9.5x 6.0x-8.0x 7.0x-9.0x 4.0x-6.0x 5.0x-7.0x EBITDA Multiple Range Guaranteed Potential Deal 8.0x-11.0x 10.0x-13.0x 5.5x-7.5x 10.0x-12.0x 5.5x-7.5x 10.0x-12.0x 4.0x-6.5x 6.5x-9.0x 5.0x-7.0x 8.0x-10.0x 2.0x-4.0x 5.0x-7.0x 4.0x-6.5x 6.0x-8.0x M&A environment will remain a sellers market until fundamentals change in the economy Availability of capital will likely create a more competitive market If the market changes, it could turn very quickly (think 2008 financial crisis) PE backed brokers are aggressively rushing to execute their strategy before the market turns (get to size, pay down debt, and get out) The impact of health care reform has yet to be truly understood and will continue to have a significant effect on M&A, especially in small group Larger Brokers brokerages continue move down stream, putting pressure on regionals and locals Carriers and International brokers will have an increased presence in M&A, as the U.S. market is attractive Banks, credit unions will “stick to their knitting”