By AgencyEquity.com
While still above average compared to other years, insurance agency mergers and acquisitions (M&A) activity took a nosedive in 2023. However, some observers are predicting a rebound in the new year.
In its report on activity through the third quarter of 2023, M&A firm OPTIS Partners announced, “(T)he 25-month M&A bubble that began in December 2020 is over.” Announced deals in that quarter were 9% below the count in the second quarter and more than a third lower than in the third quarter of 2022. However, the report attributed much of this decline to two major players putting the brakes on their purchasing activities. Their slowdown accounted for the majority of the decline.
As of this writing, the final numbers for 2023 have not been reported. However, OPTIS predicted a total deal count for the year of around 750, which is less than the annual average for 2021 and 2022, but still higher than the average for the three prior years. Consulting firm MarshBerry echoed that prediction and noted that, even with the decline, 2023 would end with the third-highest number of transactions in industry history.
In addition to the low activity from the two major players, the slowdown resulted at least in part from the relatively higher cost of capital. In an effort to bring inflation under control, the Federal Reserve kept interest rates high. That strategy seems to be succeeding – consumer inflation has fallen from annual rates of 9.1% in June 2022 to 3.4% in December 2023. If the inflation rate continues to trend toward the Fed’s goal of 2%, the window may open for lower interest rates this year.
Despite the slowdown, agency sellers continued to benefit from rising valuations. The total purchase price potential for all transactions rose 7.8% from year-end 2022 levels.
The outlook for 2024 and beyond is unclear, but there are some forces that may drive M&A activity back upward. Vaughn Stoll and Mark Prampero, acquisitions directors for national broker Brown & Brown, cite three trends that will impact the M&A market this year:
●Potential buyers that carry high debt loads will have less room to maneuver. They will be paying high interest rates even as inflation declines, hampering their ability to grow and expand. Sellers seeking large contingent payouts may find these buyers unattractive.
●Sellers are thinking about more than just purchase price. They are looking for quality management, sound carrier relationships, use of current and effective technology, strong cybersecurity, and potent recruiting of new talent. They will gravitate toward buyers that can offer these things.
●Good agencies will remain in demand. With diminished resources available, buyers will seek out the best agencies on the market. Agencies with histories of steady and profitable growth, sales-oriented cultures, well-utilized technology, diverse suites of carriers, sound risk management, succession plans, and records of retaining talent will have no trouble attracting interest.
One public policy factor that may be a wild card is the looming expiration in 2025 of some of the 2017 federal tax cuts. The outcome of the U.S. presidential and congressional elections will have a major effect on whether those cuts are extended. MarshBerry says that Congress may extend the tax cuts for middle class taxpayers but permit some of the cuts for wealthy individuals and businesses to expire. That could encourage some agency owners to sell while they can reap larger tax benefits.
The M&A market took a breather in 2023, but that pause may not last long. This is the time for agencies to upgrade their use of technology and learn how to incorporate newer technologies such as artificial intelligence into their businesses. They should focus on selling more policies to their current clients in addition to seeking new ones. Sales focus and effective use of technology coupled with good carrier relationships and an emphasis on errors and omissions loss prevention will make an agency attractive to buyers regardless of where interest rates end up. Agency owners who invest time and resources now will be rewarded when they sell.
