Merger and acquisition activity for insurance agencies and brokerages has slowed dramatically since October 2008, when our economic meltdown began. With consumers losing trillions of dollars of value in the stock and housing markets, they responded by freezing spending, and as a result, the economy shrank at the fastest rate in 30 years.

If year-to-date trends continue, Reagan Consulting projects that approximately 170 deals will be completed in 2009–making it the lightest deal year in this decade, as the accompanying bar graph indicates.

While M&A activity in nearly all sectors of the economy has dropped due to the credit crisis and the recession, there are also some unique factors that have hindered activity in our industry, including:

o The soft market for commercial property and casualty pricing has continued, and is now completing its sixth year.

o The Obama administration's number-one legislative issue–health care reform–has dampened buyer enthusiasm for employee benefits business.

o Banks, which have been the buyer in over 25 percent of the announced deals since 2000, have mostly been sidelined due to the crisis in their core business.

Yet in spite of the challenges noted above, there are some promising signs of life for the agency M&A market. Indeed, there are some early indicators of a resumption of the annual pace of 200-plus deals we've seen over the past decade.

Here are five indications that agency M&A pace will pick up in 2010:

o Pricing: Sellers are finding that valuation multiples have not dropped as precipitously as initially thought. With the credit freeze and economic turmoil of late 2008 still fresh, many buyers and sellers became very cautious in early 2009–afraid of making a mistake in the midst of the uncertainty. It was common knowledge that M&A pricing was down, but it wasn't clear by how much.

Today the smoke has cleared. EBITDA multiples for most acquisitions are down approximately 10-to-15 percent from the highs of 2007. While this is a meaningful movement, it is not earth-shattering–and brings multiples back to where they were in 2005.

The bigger pricing challenge is actually the perception of the future. Since most deals are priced with an earn-out component representing 15-to-30 percent of the total potential purchase price, it is the seller's confidence in future results that drives their perception of whether or not the deal they're being offered is worth pursuing.

In early 2009, with the short-term future looking grim, many agency principals decided to simply wait until the economy improved.

o The economy is improving: The steep drop the economy experienced in late 2008 and early 2009 has passed. Second-quarter GDP was negative, but only slightly–declining at less than 1 percent. As a result, the stock market has rallied strongly (the S&P 500 is up 17 percent for the year and a stunning 56 percent over its low of March 9, as of this writing) and consumer sentiment is regaining some of its lost confidence.

This is giving buyers more comfort in pursuing deals, and is providing sellers with a greater assurance that their post-closing performance can actually lead to meaningful earn-out dollars.

o The soft market is easing: Agents have suffered in recent years from a soft market that began in 2004. The worst of it came in 2007 and 2008, when the bottom dropped out and commercial insurance renewals were regularly declining by 10 percent or more.

According to various market surveys, commercial pricing remains soft, but is far better than it was, with decreases now in the mid-single-digit range.

With the severe soft market subsiding, agency principals are now finding that with a strong effort to write new business, modest revenue growth is once again achievable. This improvement is heartening buyers and also providing sellers greater comfort that earn-outs can be achieved.

o Local and regional brokers are stepping in as buyers: In recent years, privately held brokers have been left out of the acquisition party, as banks, public brokers and private-equity players have had the capital and the resources to outbid them.

However, more recently–with acquisition multiples coming back toward historical levels and with the difficulties faced by some of the larger acquirers–local and regional firms have been able to have more success. For those local and regional firms that have strong operational discipline and a solid capital base, acquisitions appear to be a more fruitful source of growth than at any time in recent memory.

o The demographics of the industry will continue to drive a supply of willing sellers: With approximately 35,000 U.S. independent agencies, and with the average agency principal in their 50s, there will be a steady supply of sellers as far as the eye can see. Although the activity might have been interrupted temporarily by the greatest economic uncertainty in a generation, the interruption won't last forever.

Merger and acquisition activity is a permanent feature of the insurance agent and broker landscape. This is as true today as it was 30 years ago.

Although the pace of activity naturally slows during times of intense uncertainty, it inevitably rebounds when the uncertainty dissipates. Are you ready to capitalize on the opportunity when the rebound comes?

Kevin Stipe is a senior vice president and principal of Reagan Consulting Inc., an Atlanta-based management consulting firm offering strategy, valuation, and merger and acquisition advisory services within the insurance distribution industry. He may be reached at 404-233-5545 or by e-mail at [email protected]