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Record multiples for insurance brokers unlikely to decline soon

Insurance broker M&A multiples have hit an all-time high this year, and industry experts do not expect them to fall in the near future.

According to MarshBerry, base multiples in fiscal year 2018 were 8.58x, and the multiple including a "realistic" earnout was 9.30x. For the 12 months prior to Sept. 30, the base multiple was 8.95x and the realistic multiple with earnout was 9.74x. Multiples can run even higher to the extent a target achieves the full earnout.

The first nine months of this year also marked the most-active such period for M&A activity in the brokerage space, MarshBerry's data show. By their count, there have been 451 brokerage deals in the first three quarters of 2019.

Speakers at the recent S&P Global Market Intelligence Insurance M&A Symposium generally agreed that there has been a strong desire from a growing pool of buyers to enter the space that has helped drive valuations up. Paul Vredenburg, executive vice president and chief acquisition officer for AssuredPartners Inc., said the wave of eager buyers is causing some to be "overly aggressive" in their pricing around assets that may not warrant such treatment.

"The fact of the matter is, people want to be in this space so badly that they're not really looking at the dynamics of the underlying asset they're buying in a real intense way," he said.

AssuredPartners is a portfolio company of Apax Partners LLP.

Devanshu Dhyani, head of strategy and corporate development for Marsh & McLennan Cos. Inc., had a more serene view of current valuation levels.

"Given its track record, these valuations make sense for the buyers," he said. "Many of them are coming in with a lot of experience and a lot of knowledge and believe they can add value and justify those prices."

Dhyani was not certain whether the macroeconomic environment would continue to support such strong valuations; if the prices for similar quality assets are to remain where they are, he thinks buyers will have to figure out more ways to "ring out synergies."

Vredenburg said he did not think any of the big buyers would "blow up" in terms of an extreme change, but noted that the private equity behind them has a shelf life since everybody has a recapitalization or capital event that needs to take place.

"I think there are a lot of people out there that are using their equity as a carrot with the idea of using overvaluation of that go-forward equity," Vredenburg said. "If they're not really able to achieve what they've promised to the people joining or they have to sell to a strategic that someone didn't want to join, that would be the blowup."

Elan Sharoni, vice president of mergers and acquisitions for NFP Corp., said the industry is in a "relatively new normal" with a large number of targets, more acquirers than ever before and capital to match.

"It would probably have to take something pretty macro, whether it's a recession or some other factor to cause people to be a little more cautious and scale back a little," Sharoni said. "Otherwise, I don't see a reason why people would slow down."

NFP is a portfolio company of Madison Dearborn Partners LLC.

Sharoni did say there could still be some players that could "run into trouble."

"I think where we might see that is places where you see more of a rollup in terms of the businesses being acquired not getting integrated together," Sharoni said. "Those types of businesses tend to be susceptible in a downturn."