Brokers continue to gain; M&A activity remains steady

Stock Prices: Insurance brokers continued to experience gains in their stock prices in October and November. The median increase was 6 percent compared to a 10 percent increase for the August and September period. With the exception of Willis, all companies are trading at 90 percent or greater of their 52-week high. Aon and Brown & Brown once again had double-digit growth in their stock prices for the two month period. Both companies are trading at 98 percent of their 52-week highs. Aon announced that it is exploring strategic alternatives relating to the ownership of its warranty, credit insurance, and P/C underwriting businesses. Investors continue to respond favorably to the company’s cost cutting initiatives. Aon’s stock is up 56.3 percent year-to-date. Brown & Brown, Hub, and USI Holdings have all experienced surges of over 20 percent in their stock price year-to-date.

Valuation Multiples: Multiples in the sector have remained fairly constant over the last several months. The median trading multiple for price to revenues was 1.78 at the end of September and was up slightly to 1.81 by the end of November. During this period, Brown & Brown increased its price to revenue multiple to 5.39 from 5.02 at the end of September. Overall, brokers are trading at a healthy 11.30 times median price to trailing EBITDA.

M&A Activity: Activity remained steady in the sector with 28 deals announced in October and November. Carriers continued to buy brokers to increase business through controlled distribution. On Nov. 14, Hallmark Financial Services Inc. executed a definitive agreement to acquire Texas General Agency Inc. and certain affiliates for approximately $44.9 million in cash of which $36.7 million is unconditional. This acquisition, the largest announced in the two month period, includes TGA’s wholly-owned subsidiary, Gulf States Insurance Company, which reinsures a portion of the business written by TGA. TGA expects to write $120 million in gross premiums in 2005. Willis, announced three acquisitions in November, all are foreign brokers. Willis plans to acquire two in South America with combined revenues of approximately $5.2 million. The China Insurance Regulatory Commission granted approval for Willis to increase its ownership interest in Willis Pudong Insurance Brokers Co., Ltd. to 51 percent. Willis is the first international insurance broker to hold a majority share in a fully licensed brokerage operation in China.

Raising Capital: In November, Willis announced that its secondary public offering of 6.1 million shares of common stock by certain shareholders has been priced at $36.41 per share. Willis also agreed to purchase 1.5 million shares directly from the selling shareholders in a private transaction at the net price per share to be received by the selling shareholders in the underwritten offering. Willis and Gallagher announced credit facilities in October.

LMC Capital LLC is a national investment banking firm focused exclusively on the insurance industry. The firm can be contacted at (704) 943-2600, by e-mail at Info@LMCCapital.com or visit the firm’s Web site at www.LMCCapital.com.

Topics Mergers & Acquisitions Agencies