IS THE SKY FALLING?
Is now the time for agency owners to explore options?
While an insurance agency is an attractive investment in any market,
buyers will start to feel pricing pressure if interest rates continue to rise.
By James Graham, CVA
While the number of transactions is down, mostly due to the large number of deals pulled into 202I to protect sellers from potential tax changes, prices continue to rise. The buyer community is showing no sign that the rising cost of capital will affect valuations.
Just as the world started to feel a little more normal as the COVID-19 pandemic began to slow, new challenges emerged. Massive stimulus spending related to COVID-19 response by governments worldwide, the still struggling supply chain, and now the war in Ukraine have combined to manifest in inflation rates that haven’t been seen since the early 1980s. As a result, the Federal Reserve is being forced to tighten its balance sheet and raise interest rates.
The sharp increase in rates is having the desired effect of slowing demand, which many are concerned will lead to a recession. The S&P 500 index finished 20% down through the first six months of 2022, marking the worst first half of the year performance since 1970, while the 10-year Treasury had its worst first half since 1788. Further, one of Wall Street’s favorite recession signals, the yield curve inversion between the two-year and 10-year Treasuries happened back in April and again in June and July of this year.
What does this all mean for the merger and acquisition (M&A) market for insurance agencies and brokers? The insurance distribution sector is again showing itself resilient. The MarshBerry Insurance Broker Index declined only 8.5% through the first six months of the year, outperforming the S&P 500 Index by 11.5%.
The investment community sees the insurance industry as a good place to deploy capital during an inflationary period. This sentiment is showing up in increased prices and demand for insurance brokers. While the number of transactions is down, mostly due to the large number of deals pulled into 2021 to protect sellers from potential tax changes, prices continue to rise. The buyer community is showing no sign that the rising cost of capital will affect valuations.
As an agency owner, there hasn’t been a better time to explore one’s options to partner with a larger broker. The number of well capitalized buyers has increased by 32% in just two years with the top performing buyers growing at an average rate of 33% per year. In contrast, the average independent agency grew only 7.8% last year. The increase in buyers means a seller has more options than any time in history and can look beyond just value and focus on finding the right fit. In addition to the expanding buyer pool there are now more sources of capital than ever, allowing larger agencies more avenues to fuel growth.
Given the macroeconomic headwinds, it is unclear how long value and demand will stay strong. While an insurance agency is an attractive investment in any market, buyers will start to feel pricing pressure if interest rates continue to rise. If an agency owner believes inflation will be an ongoing and persistent issue, they should act quickly before the cost of capital rises to the point where we do see multiple compression.
Further, the hard market has provided fuel to the valuation fire as premiums expand. However, there is speculation in the market that if rates rise enough to provide carriers with meaningful investment income, it may embolden them to get more aggressive and try to take market share.
In acting quickly, don’t neglect to get professional advice and retain an expert to advocate for you. Buyers are pros and agency owners are amateurs by comparison when it comes to mergers and acquisitions. Even buyers as pros hire experts to represent them.
You get only one chance to sell your firm; don’t squander the value you have built by working directly with a buyer and flying blind.
James Graham joined MarshBerry in 2015 and is a vice president on Marsh-Berry’s Financial Advisory team in its Dana Point, California, office. His expertise includes merger and acquisition advisory, capital raising, business valuation, perpetuation and succession planning, and strategic planning. James provides his clients with customized financial and capital strategies to help them accomplish their goals. He also is a facilitator for MarshBerry’s Connect Network and actively publishes articles relevant to the insurance distribution marketplace. Prior to joining MarshBerry, James was a Senior Consultant with Deloitte Consulting LLP. James currently maintains the FINRA Securities Industry Essentials (SIE®) Exam in addition to the Series 62, 79 and 63 FINRA Registrations through MarshBerry Capital, LLC, the affiliated FINRA-registered broker-dealer of Marsh, Berry & Co., LLC. He earned a Bachelor of Science in Finance from Azusa Pacific University and a Master’s in Business Administration (MBA) from George Mason University. He is also a Certified Valuation Analyst (CVA). Contact him at James.Graham@MarshBerry.com or (949) 272-0351.
As of July 31, 2022, there have been 263 announced M&A transactions in the United States. The current volume of deal announcements represents a 25% decrease compared to this time last year. However, there have been consistent increases in monthly announcements since March of this year. Over the last three years, there has been a strong increase in deal activity as fourth quarter and year-end approach, so the 2022 deal count is anticipated to close the year out strong.
Private-capital-backed buyers accounted for 194 (73.8%) of the 263 transactions through July, remaining atop the various buyer classes. As previously mentioned, this trend is expected to remain consistent throughout the rest of 2022 as dry powder continues to be deployed. Public brokers have remained consistent with last year in terms of total deal count, making up 6.8% of total announced transactions.
Strong deal activity from the marketplace’s most active acquirers has remained constant through July. Ten buyers accounted for 54.9% of all announced transactions observed, while the top three (Hub International Limited, Acrisure, LLC, and BroadStreet Partners, Inc.) account for 22.8% of the 263 total transactions.
Two notable transactions:
- July 13: Specialty Program Group (part of Hub International) announced its acquisition of ESP Insurance Brokerage. ESP is a program administrator for the sports, events and entertainment industries. The firm’s coverages insure over 850,000 youth sports participants and had insured limits of over $1.5 billion across special events of all types.
- June 30: Patriot Growth Insurance Services, LLC, announced its acquisition of BMT Insurance Advisors (BMT). Based in Philadelphia, Pennsylvania, BMT was previously a business division of WSFS Financial that provides personal and commercial lines with specialization in educational institutions, small businesses, nonprofits, and social service organizations.
Investment banking services offered through MarshBerry Capital, LLC, Member FINRA and SIPC, and an affiliate of Marsh, Berry & Co., LLC, 28601 Chagrin Blvd., Suite 400, Woodmere, Ohio 44122; (440) 354-3230. Disclosure: All deal count metrics are inclusive of completed deals with U.S. targets only. Scorecard year-to-date totals may change from month to month should an acquirer notify MarshBerry or the public of a prior acquisition. This year’s statistics are preliminary and may change in future publications. Please feel free to send any announcements to M&A@MarshBerry.com. Source: S&P Global Market Intelligence, insurancejournal.com, businessinsurance.com and other publicly available sources.