The rapid pace of insurance agency sales shows no signs of letting up, and it’s pushing up agency valuations.
Mergers and acquisitions (M&A) activity in the first half of 2021 was up 10% over the same period in 2020, according to a recent report by OPTIS Partners. While the market was hampered by pandemic concerns during the first half of 2020, the 339 reported 2021 transactions were on par with 2019 levels. In addition, the 823 transactions for the preceding 12 months were a marked increase from the 12-month period ending in March 2021.
An analysis by S&P Global Market Intelligence told a similar story, with 375 deals involving insurance agencies and brokerages, up from 331 in the first half of 2020. Acrisure alone closed on 31 M&A transactions.
The increased demand for agencies is pushing up price tags, with some deals reaching eight figures or more. A Massachusetts-based agency with 11 offices and more than 220 employees sold to an investor group for $262.9 million. A bank sold its Erie, Pennsylvania insurance subsidiary to USI for $31.9 million. Even a small health insurance agency in Michigan fetched $2 million from Reliance Global Group.
The buyers are primarily large firms backed with private equity money, such as Acrisure, AssuredPartners, Hub International, The Hilb Group and Gallagher. They accounted for two-thirds of the transactions during the first half. However, one-quarter of the deals came from privately-owned buyers, an increase from 17% during the same period in 2020.
Experts say there are several factors driving increased M&A activity.
Sellers are locking in low tax rates.
The Biden Administration wants to nearly double the capital gains tax rate for the highest income earners. While Congress may not agree to an increase that large, it may well approve a smaller capital gains tax hike. That would impact agency owners whose incomes are taxed at individual rates. Those who may have planned to sell within the next three years are reconsidering, with many putting their agencies on the market now.
Low interest rates.
The yield on 10-year U.S. Treasury Bonds is hovering around 1.25%. Private equity firms with cash need alternative, moderate-risk investments that produce higher yields. PE firms lacking sufficient capital can borrow cheaply. For both, insurance agencies, with their dependable cash flows, are attractive options.
Organic growth is difficult.
A new report from Reagan Consulting showed that a hardening commercial lines market pushed organic growth for independent agencies up in the second quarter of 2021. However, that was the highest rate in eight years, and personal lines growth was only 2.1%. Over the long term, agencies relying on organic growth may struggle to meet production targets. Acquiring other agencies may be an easier way to grow.
Agencies that take full advantage of automation are realizing efficiencies and growing their profit margins. Many are absorbing the lessons they learned about effective use of technology during the pandemic and have made them regular features of doing business. Video conferencing, self-service portals and automated marketing are making these agencies more profitable and more attractive to buyers.
The Optis Partners report forecasts increasing deal counts through the end of 2021, larger transactions, and more activity between privately-owned agencies of all sizes. More sellers will seek to avoid higher capital gains taxes, and buyers will need to purchase larger agencies to fuel growth. Agency owners considering a sale should hold down costs and improve their use of existing technologies. Efficient agencies with higher profit margins will reap the benefits of a hot M&A market with rising valuations.