By David Bull

Feb 28 - (The Insurer) - CRC Group’s proposed acquisition of Stone Point Capital stablemate ARC Excess & Surplus is one of a wave of transactions expected in what is set to be a highly active year for specialty distribution M&A, fuelled by strong buyer demand.

This publication exclusively reported on Monday that TIH-owned wholesaler CRC is in talks to buy Long Island-based ARC in a potential $500 million deal.

Sources familiar with the situation said that bilateral negotiations are ongoing without a wider process. The firms’ shared private equity ownership is understood to be driving the potential combination, which would add around $1 billion of estimated premium volume and $100 million of revenue to CRC.

For CRC, a successful deal would fulfil management’s stated ambition to get back on the front foot in M&A after the wholesaler was spun out of Truist Financial Corporation as part of the Stone Point-led transaction to buy the rest of TIH from its former banking parent.

Following TIH’s sale of retailer McGriff to Marsh McLennan, CRC touted its status as an independent wholesaler – a position it believes will make it more attractive as it looks to add talent and acquisitions.

In December, E&S Insurer was first to report that CRC had purchased SLB Insurance Group in its first acquisition since the McGriff sale.

Consummation of a deal to buy ARC would be a bigger statement of intent, with sources pointing to a potential 15x multiple of EBITDA of around $30 million. ARC has a focus on management and professional liability business for SMEs and is led by founder Chris Cavallaro as executive chairman and Mike Cavallaro as president and CEO.

Uncertainty over CRC’s future ownership during Truist Financial Corporation’s protracted move to divest its insurance distribution business meant the wholesaler was largely left on the sidelines amid active M&A plays by its biggest rivals.

Most notably, Ryan Specialty has executed a flurry of deals, albeit largely on the underwriting side of its business, with acquisitions including Innovisk Capital Partners, US Assure, Velocity Risk Underwriters, Castel and the P&C MGUs of Ethos Specialty.

Opportunities for pure wholesale brokerage consolidation at scale are limited after several of the second-tier firms below Amwins, Ryan Specialty and CRC were snapped up in the last few years.

These included USI’s 2019 deal for US Risk, the 2020 acquisition of All Risks by Ryan Specialty, Amwins’ move to buy Worldwide Facilities in 2021, and Ryan Specialty acquiring the relatively nascent Socius Insurance in 2023.

The remaining members of the top 10 include operations owned by retailers, such as Gallagher’s Risk Placement Services and Brown & Brown’s Bridge Specialty, and firms viewed as not for sale, including HW Kaufman’s Burns & Wilcox and independent Brown & Riding.

But M&A across the broader specialty distribution space, including wholesale brokers, MGAs, MGUs and program administrators, is expected to be highly active in 2025.

STRONG DEMAND, LIMITED SUPPLY

Data from M&A advisory firm MarshBerry shows that the volume of specialty distribution transactions fell by a third from 181 in 2023 to 120 in 2024 – a decline it put down to limited supply amid rampant demand, a dynamic that has maintained valuations at record levels.

However, at its Peak Performance Summit in Utah earlier this month, MarshBerry said it expects a rebound in deal volume this year.

Demand for specialty distribution businesses is being driven by a surfeit of buyers. These include private equity-backed platforms, including newer players such as Bishop Street Underwriters, as well as publicly held intermediaries seeking to tap the attractive returns such businesses can generate as well as greater E&S market access.

As we report elsewhere in our February issue, MarshBerry estimates that the E&S market will continue to outgrow and outperform the larger admitted market in the near term.

The firm in presentations at the event said it is highly confident surplus lines premiums will equal or exceed 25% of total commercial US P&C insurance premiums by 2026.

The M&A advisory firm estimates that the wider specialty insurance segment in the US currently represents around $210 billion of premium, including $132 billion of surplus lines business, with the balance from admitted specialty delegated authority business.

Growing at 15% a year, that total is expected to top $240 billion by the end of this year.

MarshBerry’s chairman and CEO John Wepler at the event spoke of a “15-year super cycle” for specialty distribution.

“It’s the longest run of GDP growth, other than COVID, that we’ve ever witnessed as a nation; record levels of claims, inflation, social inflation and nuclear verdicts have created huge exposure-based growth; increase in frequent severe weather events … you have been sitting on business that has been growing substantially because exposure growth has been literally exploding under your feet for the last 15 years,” he said.

Wepler also highlighted the longest hard market ever witnessed, driven by claims costs and inadequate pricing.

“So, we’re living in a hard rate environment, compounding upon an exposure-based explosion. On top of that, the specialty distribution area, the whole world has tried and succeeded to get into your business,” he told delegates, noting that 18 of the top 20 brokers now have a specialist distribution platform.

He also pointed to “overwhelming demand” from the equity market to place bets in the distribution space because of its “outsized, best-in-class investment returns”.

George Bucur, managing director and specialty practice co-head at MarshBerry, said that despite the appeal of being an independent specialty distributor in the “greatest industry in the world”, the trend will continue to see the “large getting larger”, using the greater clout achieved through M&A for “extracting revenue, profit and value”.

He noted that there are now 28 specialty firms with P&C premiums of more than $1 billion, a number that has tripled in the last five years.

“Concentration of power at the top is happening … firms are using capital in order to get to the threshold of $1 billion plus and to hit the far end of the relevancy continuum,” Bucur commented.

He added the other key trend among those firms is the emergence of the “four-legged stool”.

“They have delegated authority, general binding and wholesale brokerage capabilities. More recently they’re adding alternative risk management resources.

“That allows them to either attract clients, retain clients, or keep more of the commission pie that otherwise would be given away. Then finally, they’re using that premium volume with negotiation clout in the marketplace to help insulate their organisations,” Bucur continued.

He said that consolidators are able to unlock value through retaining historically high commission payments; product development; cross-sell capabilities; offering multi-program deals to carrier partners; streamlining wholesale relationships or bringing services in-house; offering strategic markets premium accessibility; investing in value-add services; and driving profitability and growth through the effective use of technology and data analytics.