S&S CEO Nat Calamis Talks Acquisition

FOLLOWING A BANNER 2015, the insurance industry is poised to have another strong merger and acquisition year, although deal making may not look quite as lucrative for sellers as it has in the past.

Last year was the most active year for mergers and acquisitions across all insurance industry sectors in the United States, according to an annual report by Deloitte Consulting LLP.  The number of deals through November surpassed the $5 trillion mark in aggregate for the first time, representing a 37 percent increase from $3.7 trillion in 2014.

“You’ve got a lot of the  smaller firms selling out,” said Natale “Nat” Calamis, president and CEO of Starkweather & Shepley Insurance  Brokerage Inc. “Equity markets and the  low interest-rate environment say it’s time to get out.”

The  high volume of consolidations is happening regionally as it is nationally – where large companies and private equity firms are acquiring smaller firms, aggressively rolling up the  industry. The  trend began about five years ago, according to Guy Asadorian Jr., wealth director at BNY Mellon Wealth Management in Providence, who says private-equity companies especially have been attracted to the  insurance industry because of the high rate of reoccurring revenue and reduced levels of risk.

“Private equity firms realized a number of years ago that insurance is a fragmented market and there was an opportunity to come in and consolidate these companies,” Asadorian said. “Ten to 15 years ago, acquirers of insurance agencies saw  risk in the fact  that the  owner of an agency had all the  relationships with the  clients, so those relationships would be at risk if the  owners left. I think overtime people figured out  a way  to make the  acquisitions, keep the  name of the  agency independent for a while and slowly integrate the acquired business so those relationships sustained.”

Rhode Island insurance companies have been on both sides of the  recent flurry of buyouts. Calamis, who  after more than 35 years at Starkweather & Shepley is retiring at the  end  of this year, has led the  company through a number of recent acquisitions in outside markets. The  state’s largest independent agency most recently acquired Port Royal Insurance Agency in Naples, Fla., adding to its growing presence in the  Sunshine State, and last year also bought two agencies in Connecticut, expanding its regional footprint. Calamis says the  company has acquired 16 companies in the  last seven years.

“We’re an acquirer. We’re not even thinking about selling,” he added.

Last summer, Richmond, Va. based The Hilb Group LLC bought Corner- stone Group in Warwick and Gencorp Insurance Group in East Greenwich. The  Virginia-based insurer said at the time it would combine the  operations and the  115 employees working at the two firms within 18 months. The Hilb Group’s local buyouts were a part of a larger strategy to grow through targeted acquisitions in the  middle- market insurance brokerage industry. The  Virginia-based company now has 33 offices in 10 states.

“Acquirers have the  opportunity to increase profits by eliminating redundant expenses,” Asadorian said. “The increased volume of business gives a bigger agency better pricing power with the  insurance carriers they represent.”

And  the  trend is happening at all levels. Last year, Ace Ltd.  bought Chubb Corp. for $28.3 billion, which was  the  property and casualty segment’s largest-ever deal, according to Deloitte.

“Five to 10 years ago agencies were valued at four to five times EBITDA [earnings before interest, taxes, depreciation and amortization] cash flow and the  seller would get half  of that in cash and the  rest paid out  over a five-year period,” Asadorian said. “Now, companies are being valued at up to 10 times EBITDA cash flow and the  transaction structure is almost predominantly all cash.”

The  large deals, however, are making it more difficult for smaller industry players, because of the  need for a large amount of cash on hand, which is another reason private equity firms and bigger insurers have played such a large role in the  merger and acquisition trend.

But  there are signs that these big- time deals, or “mega transactions,” as Deloitte calls them, could slow  in 2016. “Overall sector wide transaction volume in 2016 may be no less  than what we’ve  seen in 2015. Aggregate deal value, however, could be less since 2015’s total is impacted by mega transactions that may not reoccur,” according to the  report.

Regional trends will  likely follow nationwide trends, Calamis predicts, but Starkweather & Shepley will likely take a more cautious approach to the market, as commercial prices are trending downward and the  size of the  deals are so big.

“We’re taking a deep breath because we don’t want to get burned overpaying for an agency, so we’re watching it very closely,” Calamis said. “We just looked at another three in the  last four months, but we’re get- ting a little more conservative.” 

‘Equity markets and the low interest rate  environment say it’s time to get out.’

NATALE CALAMIS, Starkweather & Shepley Insurance Brokerage Inc. president  and CEO

Written By: Eli Sherman, Providence Business News

Full publication can be seen HERE