In 2020, nearly six in ten independent insurance agencies had annual revenues of less than $500,000, according to the Future One Agency Universe Study. Agencies with revenues between $500,000 and $1.249 million made up another 23.5%. At an average of $128,000 revenue per employee, agencies of these sizes have fewer than 10 employees.
The world where 85% of agencies have 10 employees or less may be disappearing. It is probable that the typical agency of the future will be larger.
Despite the recent sharp rise in interest rates, mergers and acquisitions (M&A) mania shows no sign of let-up. Consulting firm OPTIS Partners reported that there were more than 4,100 M&A deals in the five years ending in 2022. Even with climbing interest rates in 2022, annual merger activity was substantially higher than it was in 2018 – 2020.
One result of all this activity is that agency sellers continue to fetch high prices. Average base sale prices as a multiple of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) were 10.71 in 2022, up from 9.03 in 2019, an 18.6% increase. This gives sellers strong incentives to make deals, and a lot of them are getting the message. A quick check of the Insurance Agencies For Sale section of this website shows seven pages of listings.
Industry consultant Chris Burand has theorized that larger agencies are buying back business they’ve lost to startups when they make acquisitions. He noted that new agencies are being formed at the same rate existing agencies are being purchased. However, premiums are rising by only 3.5% annually and premium inflation is driving much of that. “This means that for the start-ups to survive, much less succeed, they must be taking business from someone,” he wrote. “If they are taking business from someone, might the acquirers be buying business that is escaping out the back door?”
If this is true, the market will tend to produce larger agencies as large agencies acquire the startups that have been eating their lunch.
There’s no guarantee that startup formation will continue to keep pace with M&A activity. A 2021 report showed that the number of insurance professionals over age 55 increased by 74% in the previous ten years. In 2022, one in six agency principals was over age 65. Forecasts are that half the industry’s workforce will retire between now and 2036, leaving 400,000 unfilled positions, many of them in sales.
Worse, less than 25% of the industry’s workforce was under age 35. Younger people are not showing much interest in insurance careers, let alone running an insurance agency. If there is no younger generation to perpetuate an agency, and agencies continue to command high sale prices, larger combined organizations will be the inevitable result.
Lisa Harrington, principal of industry consulting firm Abiding Strategy, believes that the younger generation will eventually arrive. She says the mix of agency sizes is cyclical, with smaller agencies achieving success, growing, eventually merging to form larger agencies, to be replaced by new smaller agencies who can provide personalized client service that larger agencies are unable to offer.
Larger agencies have other disadvantages, Harrington says. “From a staffing perspective, larger firms are often less flexible. Regulatory constraints, particularly in (human resources,) create more structural requirements.” This environment can dissuade employees from staying, and some will form their own agencies. They may also want the ability to react quickly to changes. Larger firms lose the agility that characterizes smaller agencies. “Life changes very fast, and one significant advantage to smaller firms with more local control is speed.”
However, if a new generation does not step forward to fill those 400,000 empty jobs and start new agencies, insurance buyers who want to work with agents may have to choose large agencies. The Main Street agency whose employees’ kids go to school with their clients’ kids may become increasingly rare.
To View Part 2 of this series, go to: The Average Insurance Agency Will Get Larger, Here is How You Can Seize The Opportunity (Part 2 of 2)