NU Online News Service

Merger and acquisition activity among insurance brokerages in 2009 dropped 40 percent over the previous year due to a generally tough economic environment and other factors, an investment banker reported.

Hales & Company said the overall number of announced transactions fell to 185 in 2009 compared to last year's record 307 transactions.

It was the first year the number of merger and acquisition transactions fell below 200 since 2003, the firm said, adding that it was one of the least active of the decade.

There were five reasons for the activity fall-off, said Hales:

o Uncertainty about the economy.

o Threat of national health care.

o Instability in the credit markets.

o Banks focused on strengthening balance sheets and increasing stock prices.

o Lack of capital and increased cost of debt, which reduced private equity group activity.

The valuation of transactions, based on EBITDA (earnings before interest, taxes, depreciation and amortization) fell 10 percent to 20 percent from 2008 levels.

"This decrease in valuation multiples resulted in a significant valuation gap between buyers and sellers and caused many sellers to take a wait-and-see approach to selling their agency," Hales said.

Purchase prices fell from 5.75-to-6.50 times EBITDA to 4.75-to-5.75 times EBITDA, the firm said.

Despite the difficulties, insurance brokers still led in doing deals with 131 in 2009, compared to 33 by insurance and others in the financials services sector and 21 from banks.

The deal volume in 2009, Hales noted, is comparable to the average of transactions done in 2000 to 2003. Most of the deals were for property and casualty agencies, Hales noted, with 76 percent, or 140 transactions for P&C agencies.

In a statement, Rob Lieblein, managing partner of Hales, said as the markets and economy improve there should be an improvement in M&A activity in 2010.

He called this a year of clarity as agency and brokerage owners realize that in order to maintain longer-term growth and increase revenue, a firm "needs to be fueled by a robust M&A market in which buyers and sellers can adequately address their growth and perpetuation plan."