What things look like in the independent agency space during this election year
Investors who are still cautious could see their investment in (the insurance distribution) space as a safer way to deploy capital as the market finds its footing.
By James Graham, CVA
The insurance distribution industry entered 2024 ripe for accelerated merger and acquisition (M&A) activity.
With a few bumps at the end of 2022 through the beginning of 2023, the M&A market for insurance distributors successfully adjusted to the high cost of capital, resulting in near all-time high valuations and acquirers continuing to see tremendous growth and share price appreciation.
In 2024, assuming the wider financial system doesn’t go through some sort of black swan event, it would not be surprising to see the most frenzied year of M&A activity yet, excluding the record-breaking year of 2021.
A number of factors are providing incredible tailwinds to M&A activity and valuations in 2024. Below is a non-exhaustive list of such factors:
This is an election year and, historically, the political risk associated with the tax code and other regulatory vulnerabilities become heightened in owners’ minds. Taxes were not materially raised post-COVID, but given the massive spending through the crisis, it is reasonable to assume that tax increases could be coming.
Baby boomers will continue to look to take chips off the table as they enter retirement. The majority of independent agencies do not have an adequate perpetuation plan, and owners will choose to sell versus giving away or heavily discounting their equity.
There is projected to be a record number of private equity-backed brokers looking to recapitalize in 2024. This could lead a number of them to be more aggressive in filling their pipeline to provide proof of their continued rapid growth rate to potential investors.
There will likely be more consolidation among the top 100 brokers; these headline-catching valuations could attract more capital to the market.
The cost of capital is believed to have peaked. While this belief is always subject to future events, the current market consensus is that interest rates have peaked. This means that buyers will start to feel their financial situations loosen after two years of tightening.
The number of well capitalized buyers continues to grow. A key reason valuations held when the cost of capital spiked in 2022 was the sheer number of well capitalized buyers hungry to acquire insurance distributors. This number continues to increase, and buyers that were sidelined in 2023 have raised fresh capital and are back in the market.
The relative safety of investing in insurance distribution versus alternatives will be another key factor. It is too early to proclaim the Fed has engineered a soft landing, but the economy and market conditions look favorable. Investors who are still cautious could see their investment in this space as a safer way to deploy capital as the market finds its footing.
Now is the best time to explore the market and speak with an advisor about your potential options. Even if a sale or capital event isn’t something you want to do in the near term, there is tremendous value in reviewing the market with an investment banker to assist in long-term planning.
The author
James Graham joined MarshBerry in 2015 and is a director 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.
M&A MARKET UPDATE
In 2023, there were a total of 807 insurance brokerage transactions in the U.S. (as of January 23, 2024). This deal count represents a 10.6% decrease from 2022 and the third most active year on record.
Private capital-backed buyers accounted for 576 (71.4%) of the 807 transactions (through December). The 71.4% market share represents a 12.1% increase since 2019 when private capital-backed buyers accounted for 57.3% of all transactions. Independent agencies accounted for 126 deals and for 15.6% of the market. This was a slight decrease from 2022 where independent agency acquisitions totaled 155 and represented 17.2% of the market. Bank acquisitions continued to fall, declining from 18 transactions in 2022 to nine transactions in 2023, an all-time low.
The top three most active U.S. buyers in 2023 were Broadstreet Partners (47), Inszone Insurance Services (45), and Hub International Limited (39). This marks Inszone’s first year as a top three acquirer and Hub’s second consecutive year as a top three acquirer. Their combined transactions (131) accounted for 16.2% of the 807 total transactions, while the top 10 most active buyers completed 338 of the 807 transactions in 2023 (41.9% of the total).
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. 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.
