What had been a red-hot market for insurance agency mergers and acquisitions cooled noticeably in 2022, as sharply higher interest rates and uncertainty about the direction of the U.S. economy took a toll. The slowdown in activity is expected to persist into 2023.
Consulting firm OPTIS Partners reported that the number of M&A transactions in 2022 was down 8% overall from the previous year. The number for retail and wholesale brokerages and managing general agents fell further, declining 17% from 1,066 to 885. These are publicly reported deals and do not include agency internal perpetuation arrangements, such as where one partner buys out another.
The OPTIS report told a tale of a market with multiple personalities. “In (the first half of the year,) deal count was greater each month than prior year counts for the same period,” it said. “Immediately, (the second half) began the pull back as each month was less active than in the prior year.” By the fourth quarter, transactions had fallen 25% from the levels the year before.
Driving these declines were rapid interest rate increases and fears of an impending recession. The U.S. Federal Reserve hiked its key interest rate 7 times in 2022, from 0.25% to 4.50%, to combat the highest inflation rates in decades. Many economists viewed these increases as potentially tipping the economy into recession in 2023.
The report noted that activity remained above the five-year average. Fear of a capital gains tax increase that never materialized may have driven sellers to close on transactions in late 2021 that might otherwise have occurred the next year. This “bubble,” as the report described it, made the slowdown look more dramatic than it actually was. M&A activity in the last quarter of 2021 was one-third higher than the same period in 2020 and more than double the activity in 2018 and 2019. The 2022 numbers were only slightly below those of 2020.
The M&A slowdown restrained growth in agency valuations. MarshBerry, an insurance consulting firm, reported that valuations were essentially flat in 2022 compared to the prior year. The average guaranteed purchase price was 10.71 times EBITDA (earnings before interest, taxes, depreciation and amortization,) versus 10.70 in 2021. Realistic and maximum estimates of earn-outs declined. All 3 measures remained higher than they were in 2019.
OPTIS expects slower activity to persist in the new year, predicting that “highly levered buyers may need to take a complete breather to digest what they’ve purchased.” However, they see possible bright spots: “These conditions may create opportunity for well capitalized buyers, and at the same time the shrinking inventory of privately owned A-tier firms creates scarcity value for sellers.” Indeed, 5 acquisitions of U.S.-based firms and one in England were reported just in late January.
Mark Crites of Reagan Consulting anticipates another active year. He foresees a good market for veteran and younger agencies alike if they have histories of consistent organic growth.
The fundamentals have not changed. Prospective buyers will continue to court well-managed, growing and profitable agencies that use technology effectively. However, they appear to be scrutinizing potential acquisitions more carefully. Slower-growing agencies that are behind the technology curve may not get as much attention. To rise to the top of the draft list, agencies should strengthen their balance sheets, find new efficiencies, and adopt aggressive but strategic approaches to sales. Buyers will always be interested in these agencies whether interest rates rise or fall.