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.
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:
|Buyer||Transactions|| Percentage of 2019 M&A total|
|Acrisure, LLC||58|| 9.3|
|Hub International Ltd||45|| 7.2|
|Broadstreet Partners||35|| 5.6|
|AssuredPartners, Inc||34|| 5.4|
|Arthur J. Gallagher & Co.||27|| 4.3|
|Patriot Growth Insurance||26|| 4.2|
|The Hilb Group, LLC||25|| 4.0|
|Alera Group, Inc.||24|| 3.8|
|Risk Strategies||19|| 3.0|
|Brown & Brown, Inc.||17|| 2.7|
|Integrity Marketing Group||16|| 2.6|
|OneDigital Health and Benefits||17|| 2.7|
|World Insurance Associates||17|| 2.6|
|USI Holdings Corp.||10|| 1.6|
|NFP Corp.||7|| 1.1|
As we have discussed in past articles, a major driver of M&A activity in recent times has been the emergence of private equity buyers in the market. According to an Optis Partners report, brokers owned by private equity firms or with some other form of significant outside capital support were far and away the most active buyers of insurance brokers last year.
These companies comprised about two-thirds of all buyers last year. According to PwC, the strong M&A activity expected in 2020 has also been linked to these private equity and corporate buyers. However, analysts cautioned sellers that these private equity firms may have the capital needed to fund a transaction, but they may not be able to secure the structure, resources, technology, industry relationships, and expertise that a broker with decades of experience in the industry are able to provide.
There’s a degree of “wait and see” as the pandemic runs its course.