Insurance Brokerages and Agencies May Be Prime Acquisition Targets

Like many sectors that enjoyed a strong start in January, insurance M&A activity in the first quarter abated quickly as COVID-19 became a growing concern.

At the beginning of 2020, well-capitalized acquiring companies signaled that they were ready to spend their money. But many planned deals set to close in this spring were delayed one to three because of the logistics of regulatory approvals and legal due diligence, a new report from MarshBerry says. Up until Mid-March, MarshBerry said that transaction activity continued non-stop, but since then, the deals scheduled to close in April or May have been pushed back.

Despite the developments, 134 insurance deals were announced in Q1, and 19 buyers completed two or more transactions, which made up 72.4% of all deals.

While it’s much too soon to measure the effect COVID-19 will have on upcoming M&A deals, MarshBerry writes that “the insurance distribution industry has strong fundamentals that make it an attractive investment with a relatively low-risk profile. As a result, we expect continued interest from private equity groups, public brokers, as well as privately held national and regional brokers.”

Prior to the pandemic, insurance brokerages and agencies had developed as prime acquisition targets for a large group of different buyers. Insurance agencies have enjoyed consistent growth over the past several years due in part strong market support. The improvement in macroeconomic conditions and the growing demand for insurance coverage in a toughening market has seen insurance premiums increase, adding revenue to carriers’ bottom lines. These positive result have made both strategic and financial buyers looking to acquire businesses with strong cash flows and solid fundamentals aware of the insurance industry. As such, competition for deals has been great, and agency valuations have also increased dramatically.

Pre-pandemic, experts predicted this M&A momentum to continue throughout 2020. They saw these few dynamics as important in 2020. Nonetheless, MarshBerry sees the insurance distribution industry to have strong fundamentals that make it an attractive investment with a relatively low-risk profile. It anticipates continued interest from private equity groups, public brokers, and privately held national and regional brokers.

Insurance Broker Deals on the Rise

The number of transactions taking place in the brokerage sector has been moving upward. The total number of deals in the insurance brokerage sector reached an all-time high in 2019 with 649 total transactions, up from 643 in 2018, according to Optis Partners. With the growing profitability of the sector and the amount of available capital to pursue deals, this trend had shown no signs of subsiding. Optis Partners had predicted 2020 to be another big year for M&A in the brokerage space. Of the 2019 total, the top 15 buyers made up 60% (375) of all M&A transactions for the year. The following list shows the top 15: