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HINDSIGHT 2020 - REOPENING THE ECONOMY

Posted by Gerard Vecchio on March 25, 2021

This week, in Today’s ViewPoint, MarshBerry takes a look back at three articles from a year ago to determine if predictions were on point.

The last article in the series looks back at And Now the Hard Part…Reopening the Economy.

As Today’s ViewPoint has looked back this week at what was happening a year ago – the following paragraph stands out:

A colleague recently said to me: “Closing the economy was the easy part; opening it will be much harder.”  This colleague raised questions such as how soon will people return to their offices? How jam packed will the local pubs be?  Can I put off getting my hair colored for another month? 

A lot has changed over the course of a year – but the concerns above still ring true for many. The potential of a 60% vaccination rate in the U.S. over the next three to four months, along with the influx of $1.9 trillion in capital from the latest stimulus bill, will likely stabilize state and local economies and hopefully allow many to “return to normal.”

With 2020 in the rearview, what has the impact been on the insurance industry overall? Below were questions posed in April 2020 – now with MarshBerry’s 2021 take.

2020: Are public brokers still going to continue making acquisitions?

  • 2021: Yes! After the pandemic all but froze the merger & acquisition (M&A) market in Q2 of 2020, buyer activity resumed with the pace and appetite that kicked-off the year. The result was a year that met initial expectations and should set-up 2021 for even more activity now that the resiliency of the insurance industry has once again been reaffirmed.

2020: Will strategic considerations for M&A overtake opportunistic ones?

  • 2021: Likely. With valuations increasing, interest rates poised to rise, and inflation a potential problem, margins could be squeezed, the result of which is that the strategic value of “getting it right” becomes that much more important.

2020: Will company size, product line, carrier markets or geographic diversification become more or less important when considering which companies to acquire?

  • 2021: If agencies and brokers weren’t looking at all of these key components holistically before – they definitely are now. Interestingly, there was an increase in activity in the Specialty Distribution space with 120 transactions announced in 2020 representing 17.9% of all activity. This is the largest deal count in the Specialty space since MarshBerry began separately recording specialty deals - and represents a 25% increase in activity compared to 2019. What does this mean? The need for more scale and efficiency has become increasingly more evident.

2020: Will public brokers value top performers differently from average ones (e.g. will the spreads in valuations start to widen after several years of narrowing)?

  • 2021: The jury is still out. According to MarshBerry’s 2020 Value Index, it appeared as if multiples had leveled off at the values seen in 1Q20. However, when the data was rolled forward another three months to the end of 2020 in a 12-month view, there is a fairly significant step up in valuations, both on the “base1” (aka “upfront”) purchase price and on the maximum2 deal value including all possible earnouts. In total, maximum deal value for the average transaction is up almost 30% compared to the 10-year average, with a slight outgrowth in the maximum value as compared to the base purchase price. This indicates that more recently there has been an increased shift towards performance-based consideration. 

2020: Will the number of LOIs (letters of intent) serve as a leading indicator of continued M&A appetite?

  • 2021: Yes. MarshBerry has observed that new buyers continue to express interest in making investments in insurance distribution. Perhaps more so for wholesalers and managing general agents (MGAs) than retail agencies, MarshBerry is seeing an increase in the number of submissions of formal letters of interest for specific properties seeking strategic partners.

2020: Will other state DOIs follow California’s lead in auto premium rebates and workers’ compensation coverage for COVID-19?

  • 2021: According to Insurance Journal, many auto insurers voluntarily announced refunds, discounts and credits to consumers in 2020 totaling upwards of $8 - $10 billion. These refunds were ostensibly in response to reduced policyholder driving mileage and fewer claims amid the COVID-19 crisis. While credits and dividend checks were more of a one-time response to the pandemic, it’s assumed that with advances in technology, and more individuals working at home, that more “pay as you go auto insurance plans” will become prevalent.

2020: Will insurance brokers need to up their customer service even more to respond to negative consumer backlashes?

  • 2021: Yes. In general, agents and brokers upped their game. Without the (now luxury) of seeing clients in person, advances in technology allowed brokers to stay in front of clients, understand customer needs in a changing environment and bring innovation to the table.

The COVID-19 economic fallout did not materially change buyer appetite, pricing, or seller interest in external sales. MarshBerry believes 2021 has the opportunity to match or exceed M&A volume levels seen in 2020 with demand in the industry continuing to grow. Keep hanging onto that hat. It’s about to get really interesting.

If you have questions about Today’s ViewPoint, or would like to learn more about current conditions and activity in the insurance market, please email or call Gerard Vecchio, Managing Director, at 212.972.4886.

 

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1The amount of proceeds paid at closing, including any escrow amounts for indemnification items, (i.e., Paid at Close) plus amounts that the buyer may initially hold back, but which are paid as long as the sellers performance does not materially decline, or which may be paid at closing but are subject to a potential adjustment (i.e., Live Out).

2The additional earn out above the realistic level, that if achieved, would generate the maximum possible earn out payment

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Topics: Financial Advisory, insurance, agents, brokers, m&a, financing, hindsight2020

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