After a decade of furious deal-making, insurance agency and brokerage mergers and acquisitions ebbed in 2022, likely due to rising interest rates and economic uncertainty, according to two new reports.
A report by Optis Partners, an insurance industry consulting firm, notes that the number of M&As among insurance brokerages and agencies in the retail and wholesale space dipped to 885 in 2022, down 17% from 1,066 in 2021. The authors of the report say the drop in transactions was largely due to a large “deal bubble” that saw them spike in 2021.
Insurance agency consulting firm MarshBerry, in its Q4 2022 Quarterly M&A Market Update, said that the number of M&As in the insurance agency and brokerage industry fell 23% to 708 in 2022 from 924 in 2021. It too said that the fall was especially dramatic due to the 30% surge in deal-making between 2020 and 2021.
Despite the slowdown, MarshBerry said that valuations continue to be strong and well-run agencies that are selling are reaping the rewards of their years of hard work building up their books of business.
While the average purchase price was flat in 2022 compared to the year prior, in 2021 valuations shot up 13% above 2020 levels as a multiple of earnings before interest, taxes, depreciation and amortization.
Who is doing the buying?
The majority of M&As (74%) were completed by private capital-backed buyers, according to MarshBerry, and only 12% of were completed by independent insurance agencies purchasing other agencies. Deals completed between specialty distributors accounted for 23%.
The top 10 most active buyers accounted for 49% of total transactions. The top three most active buyers (Acrisure, PCF Insurance Services LLC and Hub International) accounted for 20% of all transactions, according to the report.
What to expect this year
Both Optis and MarshBerry predict the number of transactions will continue to drop this year due to higher borrowing costs and the specter of a possible recession on the horizon.
The recent surge in interest rates is likely to force highly leveraged buyers to pull back their horns, while making other buyers take a more cautious approach, according to Optis.
On the other hand, buyers who have a strong cash position will be in a good position to continue purchasing well-run agencies and they may have an easier time with fewer buyers in the market.
“Anecdotally, it appears that investors are scrutinizing deals more closely, some deals have failed to close, and valuations are generally on the decline,” Optis wrote in its report.
Added MarshBerry: “We still see demand to be outpacing supply, but not by as large of a margin as in prior years. There are still approximately 35+ well-capitalized buyers who are still active in the market, are looking for the best firms and appear willing to pay record level multiples to get them.”
Despite the possible slowdown, MarshBerry said it sees no signs of valuations taking a downward turn. Any company that is the target for acquisition can expect that a potential buyer will “dig deeper” into the firm’s valuation.