Merger and acquisition activity by local insurance firms has reached a high water mark in 2019 as Valley brokerages scoop up companies across L.A. and the nation at a startling rate. So far this year, McLarens Inc., which has offices in Glendale, acquired American Environmental Group in Westlake Village; Appleby & Sterling Inc. in Simi Valley acquired neighboring firm Fortuna General Insurance Inc.; and Peter C. Foy & Associates in Woodland Hills acquired four firms in New York, Illinois, Colorado and California. That’s not to mention the slew of smaller Valley insurers that have themselves been acquired by firms around the country, including Highridge Insurance Services LLC of Westlake Village, which was acquired by Capital City Insurance Services in Raleigh, NC.; and Tolman & Wiker Insurance Services of Ventura, acquired by AssuredPartners Inc., in Lake Mary, Fla. On the large end of the scale, Topa Insurance Group, a Calabasas subsidiary of L.A. holding company Topa Equities, was acquired by Altamont Capital Partners in Palo Alto. This activity reflects the blazingly hot market for insurance consolidation nationwide. According to a report published in June by Optis Partners, a Chicago investment banking firm specializing in the insurance industry, there were 328 announced insurance agency mergers or acquisitions in the first half of 2019, up from 300 such transactions in the first half of 2018. This marks the second-highest six-month total on record, trailing only the first half of 2017, which saw 333 reported transactions. And the last 12 months have tallied 665 transactions, making it the busiest 12-month period ever. Of course, not all insurance acquisitions are announced, so the actual number certainly exceeded that which was reported. “The pace and aggressiveness of the buyers continues to push pricing and transaction counts to new limits,” the Optis report states. An insurance industry outlook report published by Deloitte in March pointed to tax reform and relaxed regulations as possible drivers of consolidation activity, but a few Valley insurance executives say otherwise. “I don’t think it has much to do with taxes,” said Daniel Goldsmith, chief operating and financial officer at Peter C. Foy & Associates. Goldsmith broke down three factors he sees behind the acquisition spike: “Local agents have pressure from a client-servicing perspective to work with national partners to offer a bunch of services. It’s harder to offer client services locally. … Carriers have a preference to do business with less small distribution. … And (insurance) is favored by investors given that it has predictive cash flow generation and it’s fairly recession-proof.” Specialize to succeed Peter Foy, headquartered at 6200 Canoga Ave., has been on a tear this year, acquiring four agencies that greatly diversify its offerings: Grosslight Insurance Inc. in L.A., Broadfield Group LLC in New York, Hipskind Seyfarth Risk Solutions LLC in Chicago and Colorado Insurance Sales & Service in Littleton, Co. The Colorado buy was the largest acquisition the Woodland Hills agency had ever made. It is now looking to expand its presence in Colorado with two more acquisitions before the year’s end. The company was equally active in 2018, acquiring four firms in California and Nevada that collectively inflated the company’s revenue from about $7.5 million to about $20 million. Peter Foy started as an employee benefits brokerage focusing mainly on large group medical plans. By acquiring specialized agencies around the country, the firm has added expertise in property and casualty insurance, personal line insurance, risk management and workers compensation. It now insures thousands of low-risk clients, from restaurants to small businesses to individuals, using subsidiaries as a network to find the best match and value. “We became far more specialized and we’re able to provide clients far more services,” Goldsmith explained. “We started organizing along vertical practice groups. We created a habitational risk program. We have an in-house bond department.” According to Goldsmith, diversity in service offerings brings significant strategic advantages, especially in California’s market. “Living in California, between fires, natural disasters and everything that has happened, people ask a lot more questions. Do I have enough insurance? Am I covered? It’s a hardening market. … Clients more and more need a brokerage that can handle complexity.” Growth or bust? Since starting its growth-by-acquisition strategy two years ago, Goldsmith said Peter Foy “has been doubling the size of the company every five or six months.” He expects it to break into the top 25 largest brokerages in the U.S. in the next year or two. It ranked No. 61 last year. This exponential growth has been enabled by the agency’s “really good investment base,” Goldsmith said. “It’s not risk-bearing. … Even in a down market, you still have to have insurance.” Timothy Gaspar, chief executive of Gaspar Insurance Services in Woodland Hills, echoed the sentiment that diversity is in demand. In July, his firm acquired Elden Insurance, a one-man operation in Canoga Park whose owner Dennis Helio retired this year. “The big benefit is for Elden clients because they’ll get a larger variety of services. If there’s an Elden client that wants to look into earthquake insurance, with Elden they might’ve had two options. With us they’re going to have 10,” Gaspar said. Unlike Peter Foy, Gaspar isn’t in the midst of a national growth campaign. But the Elden deal made a lot of sense strategically. Gaspar, located at 23161 Ventura Blvd., specializes in personal insurance for clients like food franchises, associations and home service businesses, while Elden exclusively worked in the personal insurance space. And the two shared a primary carrier: Mercury General Corp. in Los Angeles. Gaspar agreed that tax reform likely has little to do with the industry’s “insane” level of consolidation activity. “A lot of it is being done with borrowed money. It’s not necessarily big national players sitting on piles of cash. It’s borrowed money or it’s private equity funds,” he said. Gaspar likened the insurance sector’s ramped-up activity to that of the real estate sector in 2005, predicting the current “frenzy” will be followed by a sharp hangover. “There’s just no way for it to sustain itself,” he said. “In order to even try to get a return, if you spend (huge multiples), you have to make a lot of changes. You typically would have to pay your salespeople less commission, and in a lot of cases firms will outsource their servicing overseas to the Philippines or to India. Doing this can have a really negative effect on morale. … The insurance business is really about people. If you’re a client and the person you deal with leaves, you’re going to look around at other options.” To avoid this delayed turnover, Peter Foy treats acquisitions more like mergers. “The client-facing (operations) stay the same. We don’t change the name (of an acquired business). We don’t change the personnel. We don’t change the service model,” said Goldsmith. Gaspar agreed: “Our goal is to keep the clients happy. That typically means a lot to a seller — that we’re not going to throw it into a service center overseas.”
