The blockbuster deal of the year so far has been Wachovia's acquisition of Palmer & Cay Inc., which reportedly had revenues of $144 million in 2003. Wachovia stated in its press release that the combined operations will have over $400 million in annual revenues, which would make the firm one of the top-10 insurance brokerages.

This acquisition is significant not only for its size but also because Wachovia has not been particularly active in making acquisitions of insurance brokers over the past several years. The transaction was announced right after the end of the first quarter and therefore has not been included in first-quarter statistics.

Another significant 2005 transaction was the acquisition of Hull & Company Inc. by Brown & Brown. Hull & Company is a wholesaler that had annualized net retained revenues of approximately $63 million. In July 2004, Brown & Brown had raised $200 million in a private placement, and appears to be aggressively looking for ways to deploy this cash through strategic acquisitions.

Brown & Brown's acquisition of a wholesaler is in marked contrast to recent actions by Willis Group Holdings and Aon. On Feb. 15, Willis announced that it sold off its U.S. wholesale unit–Stewart Smith Group–to American Wholesale Insurance Group Inc. Stewart Smith reportedly had revenues of $75 million in 2003.

The following day, Feb. 16, Aon announced that it was exploring the sale of Swett & Crawford, which reportedly had revenues of $267 million in 2003. Marsh & McLennan Companies Inc. also announced plans to divest itself of a subsidiary–its private equity unit MMC Capital–to a team of MMC Capital employees.

These divestiture announcements by three of the world's largest brokers reveal a heightened sensitivity to having any appearance of a conflict of interest.

With investigations by New York State Attorney General Eliot Spitzer casting a negative image on the industry, it would not be surprising to see additional divestitures coming out of the largest industry firms. There are numerous privately backed investment groups and other very large firms that stand ready to seize these types of opportunities.

Another area that might come under close scrutiny is the reinsurance brokerage arms of these companies. Mr. Spitzer has been investigating possible tying arrangements, where reinsurance placements by an insurance carrier affect the amount of retail business that is placed through this same carrier. The business models of the largest brokers could look significantly different once the fallout from the investigation settles.

Aside from MMC, it appears that the other publicly-traded insurance brokers continue to aggressively pursue acquisitions. Table 1 (click link below) lists acquirers who announced more than one acquisition during the first quarter of 2005.

Stewart Information Services continued to snap up title insurance agencies across the country. In addition to Hull & Company, perennial acquirer Brown & Brown purchased two wholesalers as well as two retail operations.

Willis continued to acquire internationally, and also made two U.S. acquisitions of benefits firms. (In the interest of disclosure, WFG Capital Advisors LP advised on the sale of one of these benefits firms–CGI Consulting Inc.) Arthur J. Gallagher bought two retail operations as well as the reinsurance brokerage assets from JLT Re Solutions Inc., while Aon's three acquisitions were all international in nature.

While the number of transactions dropped slightly from last year's first quarter, there was a more significant decline in terms of deal value (Table 2). First-quarter 2005 transactions had an aggregate deal value of $112 million when compared to $407 million in the same period last year. Much of this disparity will level out with Wachovia's acquisition of Palmer and Cay in the second quarter; although the announced value may not be disclosed it should clearly serve as a footnote.

Last year's results included a number of acquisitions of significant size, including:

o Hub International's acquisition of Talbot Financial Corp. ($90 million).

o LandAmerica Financial Group's acquisition of County Title Holding Corp. ($90.5 million).

o Willis's acquisition of Willis A/S from its management group ($57 million).

o Brown & Brown's acquisitions of Waldor Agency Inc. ($39.5 million) and Statfeld Vantage Insurance Group L.L.C. ($34.5 million).

o U.S.I. Holdings' acquisition of Dodge Warren & Peters Insurance Services Inc. ($38.6 million).

In comparison, the largest announced deal value during the first quarter of 2005 was National Financial Partners' acquisition of Highland Capital Holding Corp. ($48.4 million). Transaction values for smaller deals are not typically disclosed, which can create disparity between announced figures and the overall consideration paid.

An interesting dichotomy exists between the number of acquisitions of retail and wholesale insurance brokers (see Table 3). In the first quarter of 2005, there was a decline in the number of retail operations acquired compared to prior year. In contrast, the number of wholesale acquisitions increased, albeit off of a smaller base.

Brown & Brown was the most active acquirer of wholesalers, announcing three deals during the first quarter of 2005. While Willis has already shed its wholesale operation and Aon is clear that it will divest itself of this type of business, it appears that other competing brokers have no concerns about acquiring these types of firms.

A review of the number of insurance agencies and brokerages acquired by type found that many of the categories showed a slight decrease from 2004 (see Table 4). One notable exception was property-casualty personal lines, where the majority of activity took place among personal auto insurance brokers, as well as technology-oriented personal lines firms, including InsLogic Corp. and ComparisonMarket Inc.

The primary bulk of acquisitions still resides within the full-service and p-c commercial segment.

Aggregate revenues of firms acquired during the quarter decreased slightly from last year as well, to $263 million in 2005 compared to $299 million in the first quarter of 2004 (see Table 5). Significant announced transactions include:

o American Wholesale Insurance Group's acquisition of Stewart Smith Group from Willis ($75 million).

o Brown & Brown's acquisition of Hull & Company Inc. ($63 million).

o National Financial Partners' acquisition of Highland Capital Holding Corp. ($62 million).

Similar to the announced deal value statistics, there is inconsistent reporting of the revenue volume of many of the smaller acquisitions, which can cause volatility in correlating statistics.

The outlook for consolidation continues to support a very high level of activity.

Concerns over the outcome of the contingent commission debate have caused some firms to question the long-term viability of this revenue segment. However, most industry participants have concluded that while the overall compensation structure may ultimately change, it is highly unlikely that regulators or carriers will take a bite out of the broker's share of the pie.

Most leading acquirers contend that their acquisition pipelines are well stocked, and they will continue to seek out strategic opportunities in light of the debate over contingency fees. It is highly likely that announced transactions will continue to trend upward during the course of 2005.

Steven Wevodau is a managing principal and Allen Go is a director at WFG Capital Advisors in Harrisburg, Pa.