Five factors driving valuation increases amid rising capital costs
By James Graham, CVA
The current financial market turmoil continues to have no material effect on merger and acquisition (M&A) valuations for insurance brokers. While capital constraints are reducing EBITDA (earnings before interest, taxes, depreciation and amortization) multiples across a number of industries, they are still expanding for insurance brokers. This expansion in pricing is driven by a number of factors that have aligned to award well-advised and represented sellers with tremendous results.
Here are some of the major factors driving the valuation increase in the face of rising capital costs:
- Premium increases. The hard market that has been fueled by record cat losses and inflation is providing brokers with material organic growth that the market expects will continue. According to MarshBerry’s proprietary deal database, the average broker grew 9.3% over the 12 months ending June 30, 2022, and premiums are up a similar amount during the same period. Expected organic growth rates are a major component of valuations. Growth in EBITDA post acquisition works to reduce the actual price paid for an agency by the buyer. This is why buyers heavily incentivize future growth via earnouts. The hard market is providing buyers comfort that they will get strong commission growth, at least in the near term.
- Increasing number of buyers. MarshBerry estimates there are 62 well-capitalized buyers for insurance brokers. This number under represents the number of firms that will do at least one deal this year and who self-identify as a buyer. The success of consolidators over the last decade has led to an increasing number of new entrants hoping for similar results. The increase of buyers has resulted in increased demand, providing pricing support so that even if a handful of buyers decided to offer lower pricing, they would just find themselves losing market share.
- Market remains fragmented. Despite a decade of aggressive consolidation, there are still approximately 28,000 independent insurance agencies in the United States. These potential targets, plus the expansion of buyers into ancillary businesses such as wealth management, have given buyers confidence that there is ample supply. The fact that the U.S. insurance system encompasses 50 unique markets with their own departments of insurance makes it hard for any one buyer to roll out a strategy that can quickly consolidate business in every market. Even some of the most mature buyers still have holes in their geographic footprint.
- Many of the well-capitalized buyers are making material investments in technology platforms that will take advantage of their scale. These investments are allowing them to augment all functions of the business and run higher revenue per employee than most independent brokers. Further, technology, has allowed the speed of acquisitions to increase, as it is rarely necessary for M&A teams to sift through paper files. Some deals now happen with the buyer’s M&A team never meeting the acquisition target in person.
- Talent acquisition. Record-low unemployment, coupled with an aging workforce, is starving the industry of talent. M&A serves as a means by which large brokers can acquire talent and achieve economies of scale that allow them to operate more efficiently than smaller local firms. The evaluation of a target’s workforce and culture are a major consideration in most transactions.
These factors are driving a fundamental shift in the industry that likely will continue, regardless of most economic headwinds. The value creation resulting from consolidation will continue to drive M&A activity for the foreseeable future.
To survive during this rapidly changing time, it is important that agency owners have a plan that promotes organic growth and fosters a culture of excellence. Firms that are not best in class and don’t have their eyes open to the changes in the market will be left behind. They will not have control of their destiny when they finally realize they have to sell to a third party as an afterthought.
Everyone eventually has to sell their company, either internally or externally, but high performers and planners get to pick how and who buys, and they get the added benefit of outsized returns.
Firms that are not best in class and don’t have their eyes open to the changes in the market will be left behind.
As of September 30, 2022, there have been 405 announced M&A trans-actions in the United States. The current volume of deal announcements represents a 23% decrease compared to this time last year. As we come closer to year-end, it’s anticipated that the rate at which deals are announced will increase—ultimately reducing the gap between 2021 and 2022.
Private equity firms accounted for 310 (76.5%) of the 405 transactions through September, remaining atop the various buyer classes. Public brokers have remained consistent with last year in terms of total deal count, making up 6.2% of total announced transactions.
Deals involving specialty distributors as targets currently account for26% of the total 405 deals year-to-date. This portion of the target population is up 16.6% since as recently as 2021. This trend is anticipated to continue as traditional retail brokers expand into the wholesale and delegated authority space.
Strong deal activity from the marketplace’s most active acquirers remains constant through September. Ten buyers accounted for 54.1% of all announced transactions observed, while the top three (Integrity Marketing Group, LLC; Acrisure, LLC; and Hub International Limited) account for 25.4% of the 405 total transactions.
Notable transactions include:
September 15: Partners Group acquired a controlling stake in Foundation Risk Partners (FRP). FRP’s management team maintained a stake in the firm, while its previous PE sponsor, Warburg Pincus, will also retain a minority position. MarshBerry served as a financial advisor to FRP throughout the transaction.
September 28: One80 Intermediaries announced its acquisition of C&M First Services (C&M). C&M is a New York-based wholesale broker that provides commercial and personal lines to Asian-American retail brokers throughout the United States.
October 3: Scottish American announced that it has acquired Hawkeye Wholesale Insurance Services, Inc. (Hawkeye).
Hawkeye is a managing general agent and wholesale broker based in Washington. The firm has a niche focus in underwriting policies for habitational, contractors’ liability, and lessors’ risk.
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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; 2022 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 and other publicly available sources.
James Graham joined MarshBerry in 2015 and is a vice president on MarshBerry’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