Local Agencies Unite
Shumsky West & Associates and the Larkin Group are two of Traverse City’s oldest and best-known independent insurance agencies. But they will soon unite, part of a merger-and-acquisition trend that is sweeping their industry.
By September, the two companies will operate as the Larkin Group with a staff of 40 working in the areas of property and casualty insurance, employee benefits and financial services.
Both companies recently sold equity shares to Acrisure LLC, a Grand Rapids-area insurance broker that invests in smaller agencies. Principals in the Larkin Group and Shumsky West became shareholders in Acrisure.
“The term I use is partnership,” said Bryan Taggart, one of the principals in the Larkin Group. “Acrisure has quickly become the seventh-largest privately owned brokerage firm in the country. The beauty of our partnership is it gives us access to many more markets, such as oil and gas, and industry specialists that we can use.”
Current clients and policyholders of the Larkin Group and Shumsky West will be unaffected by the new partnership structure, he said. The principals of the two agencies will be the managing partners of the combined agency.
In another recent northern Michigan deal, Peterson McGregor and Associates in Traverse City acquired Cadillac Insurance Center and its satellite Manistee, Grayling and Petoskey locations in May.
National M&A Activity
Nationwide, mergers and acquisitions among insurance agencies are running at near record levels.
There were 321 merger and acquisition deals in the United States last year, a 43 percent increase over 2013 activity, according to MarshBerry, an Ohio-based insurance industry consultant. That number was just short of the 325 deals completed in 2012, as companies rushed to wrap up deals before the capital gains tax increase in 2013.
“Private equity continued to flood the market, public brokers substantially increased activity … and new buyers emerged as real players,” MarshBerry Senior Vice President Christopher Darst wrote in a research report.
Merger and acquisition activity in the first half of this year, ending June 30, was expected to continue at a brisk pace, Darst said.
About half of the 136 acquirers in 2014 did their first deal that year, according to MarshBerry. Acrisure, which was formed in 2005 to invest in insurance agencies, did 16 deals last year.
Forty-six percent of all acquired agencies were property and casualty firms, 31 percent were multi-line agencies and 23 percent were employee benefit firms.
Acrisure was acquired in 2013 by Genstar Capital LLC, a San Francisco-based private equity firm. Acrisure CEO Greg Williams could not be reached for comment on this story.
Independent insurance agencies are merging, selling to larger companies and taking on new investors for a variety of reasons.
Many have steady cash flow and the ability to generate a strong return on equity, making them attractive to private equity firms that are flush with cash to invest, according to a recent report by Deloitte, a business consulting firm.
Other agencies are looking to continue business into the future while buying out partners who are retiring at a rapid pace.
“There is an issue with perpetuation of the business and agencies having enough money to buy out partners when they retire,” said Tod Beynon, who has been president of Shumsky West for the past 15 years. “I’m 63 and I might want to play a little more golf in a few years.”
Beynon has plenty of company. More than half of insurance agency owners are expected to retire in the next five years, said Bev Barney, CEO of the Michigan Association of Independent Agents in Lansing.
Barney said most of the agency merger-and-acquisition activity in Michigan has been occurring in the southern part of the state, but is starting to creep north.
“We have definitely seen that trend,” she said. “Over the past 10 years we’ve seen more agencies align themselves with other companies in a variety of forms.”
Sixty agencies have dropped their memberships in Barney’s association since 2010, citing dissolution through mergers or acquisitions. The association currently has 765 agency members.
Some, like the Larkin Group and Shumsky West, take investments from larger companies and continue to operate largely as in the past, although the two companies are becoming one. Others sell out and the former owners walk away.
Owners are scrambling to establish succession plans and figure out how to perpetuate their agencies, many of which have been community pillars for decades.
“There’s a heightened awareness that if owners get too close to the end” of their careers, “it might be too late to merge” with a larger company, Barney said.
Looking To The Future
Owners of small businesses in general are doing a poor job of planning for the future, said Joseph Horak, director of the Family Owned Business Institute in the Seidman College of Business at Grand Valley State University.
A 2014 institute survey of nearly 700 family-owned businesses in an area stretching from St. Joseph to Petoskey found that 80 percent of owners said they want to pass on their businesses to family members. But only 19 percent had written succession plans.
“There are lots of challenging issues in business succession,” Horak said. “Do owners want to keep the businesses in the family or do they want to get out? Is there enough liquidity to pay out an owner? It’s complicated.”
One trend Horak sees among West Michigan businesses is mergers among companies with shared values in how they operate, treat employees and support the community.
Taggart and Beynon said that’s at the heart of the Larkin Group and Shumsky West partnership, and equity relationship with Acrisure.
“We were looking at the future and wanted to align with a great partner,” Beynon said. “Larkin told us their story and put us in contact with Acrisure. We have their stock and the ability to run our own shop.”
Taggart said the Acrisure partnership gives the Larkin Group more access to capital to invest in new markets and ever-changing technology, two big issues for insurance agencies.
“We never had access to the oil and gas markets,” Taggart said. “Now we can bring a specialist in from Acrisure to talk to customers. Acrisure also has an attorney who can meet with our customers on issues with the Affordable Care Act. Our customers are loving that.”