Economic conditions blamed as insurance agency M&A dips in 2021

There were 987 announced insurance agency mergers and acquisitions in 2022, down 8% from 1,075 reported in 2021, according to OPTIS Partners.

A significant rise in interest rates and economic uncertainty may be forcing a few buyers to pull back and causing nearly all buyers to proceed more cautiously, the firm said.

Deals in the second half of 2022 were up 16% over the first half of 2022, but down 25% over the second half of 2021. The 282 deals during the fourth quarter of 2022 were 14% higher than the third quarter of 2022, yet 30% lower than over the same period in 2021.

The second half of any given year is busier than the first half, but more importantly, the year-over-year decline most likely reflects rising interest rates and economic uncertainty.

Activity by buyer and seller types

OPTIS Partners tracks buyers by four groups: private equity-backed/hybrid brokers, privately held brokers, publicly held brokers, and all others.

Sellers are classified as U.S. and Canadian property/casualty and employee benefits brokerages, third-party administrators and related managing general agent operations. The tally was expanded in 2022 to include agencies solely focused on life insurance, investment or financial management, consulting and other business connected to insurance distribution.

When the newly admitted categories of sellers are excluded, the decline is even more dramatic as the number of transactions declined 17% from 1,066 in 2021 to 885 in 2022.

“2022 was a tale of two halves,” said Steve Germundson, partner at OPTIS Partners, an investment banking and financial consulting firm specializing in the insurance industry. “The robust first half was driven by a built-up inventory of deals yet to be completed and still favorable economic conditions. The buying spree continued as there were 23% more deals done than in the same period in the prior year.

“However, as soon as the third quarter began and deal inventories fell, the impact of rising costs of capital was felt and the flow slowed. Interestingly, the deal count in each of the first six months of 2022 was higher than the same month in the previous year, and each of the last six months was lower.”

Top buyers

Acrisure continued to lead all buyers with 107 transactions in 2022, down 12% over its 2021 totals, yet 3% higher than its previous five-year average.

PCF Insurance followed with 71 completed transactions (down from 99 in 2021). Other top buyers were Hub International with 70 acquisitions (up from 62 in 2021) and High Street Partners with 44 (down from 71 in 2021). Inszone Insurance Services with 42 deals (up from 12 in 2021) rounded out the top five.

Another group of active buyers recorded between 30 and 40 transactions in 2022: World Insurance Associates (39 in 2022 v. 53 in 2021), BroadStreet Partners (35 v. 45), Liberty Company Insurance Brokers (33 v. 10), Assured Partners (33 v. 52), and Alera (30 v. 45).

Out of the 17 firms that did more than 20 deals in 2022 only Hub, Inszone, Liberty Company, and Keystone Agency Partners did more deals than in the prior year. Those among this group of 17 dealmakers that booked the most dramatic decreases were PCF (28 fewer deals), High Street Partners (27 fewer), and AssuredPartners (19 fewer).

Private equity buyers dominate

There was no material change in the types of buyers driving M&A activity. Private equity-backed/hybrid group of buyers continued to dominate the volume of transactions at approximately 75% of the total.

Acquisitions completed by privately held firms increased somewhat to nearly 17% while publicly traded companies dropped somewhat to 4% of all deals, respectively. The most active privately-owned buyers in 2022 were Liberty Company Insurance Brokers at 33 (up from 10), Westland Insurance Group at 15 (up from 9), and TrueNorth Companies at 10 (up from 4).

P&C agencies most often sold

P&C sellers accounted for 557 of the total 978 transactions (56%), similar to their percentage of the totals in recent years.

“The industry seemingly turned on a dime starting July 1st. Deal counts are down, underwriting scrutiny is higher, and valuations for most, except the A-tier sellers, are down some,” said Tim Cunningham, managing partner of OPTIS Partners.

“We are likely at the beginning of a transition period that brings us back to historical norms. Interest rates are higher than they have been in recent memory but are still at or below long-term historical averages. Valuations for all but the best may have moderated, but they are still well above values from just a few years ago. And while deal count has slowed materially, the second half of 2022 was still 19% higher than the previous 5-year average.”