Independent insurance agency mergers and acquisitions activity continued its ten-year trend of increasing in 2021. A recent report by industry consulting firm OPTIS Partners shows that activity accelerated over 2020 levels with little sign of slowing down much. Agency owners thinking about selling should find a healthy market for their businesses.
There were 1,034 announced M&A transactions during 2021, up 30% from 795 in the pandemic-hampered year of 2020. The pace was still hot at year’s end; transactions were up 26% in the final quarter from the same period in 2020, to 384. There were only 326 transactions for the entire year in 2012.
Daniel P. Menzer, CPA and a principal with OPTIS Partners, wrote, “The underlying factors fueling this increase are the same as those in the prior year: Aging owners facing a concern regarding an increase in capital gains (tax) and inadequate perpetuation plans meeting up with investors flush with massive amounts of capital.”
The increasing activity is pushing up agency sale prices. Consulting firm MarshBerry reported that the average guaranteed purchase price in 2021 increased almost 13% above 2020 levels as a multiple of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA.) “With the increased demand in the industry, there is still not enough supply to meet the appetite of all the industry’s investors,” observed MarshBerry’s Phil Trem. Indeed, average maximum EBITDA multiples (after taking into account all contingencies) are up 87% since 2010.
In comparison, the average yield on a 10-year U.S. Treasury bond in 2010 was 3.22%; its compounded yield by 2022 would have been only 46%. This 40 point premium in the value of agencies helps explain why so many investors are pursuing them.
And pursue them they have, particularly the big players. Three firms accounted for almost 20% of 2021 transactions and 10 of them were involved in half. Acrisure alone has made 521 purchases in the past five years, 230 of them in the last two years. Hub International has made 178 purchases in the past three years. Private equity capital is flowing into these and other firms, providing significant funding for three-quarters of 2021 deals. The top 10 buyers since 2017 have all had at least partial backing from private equity firms. Please note, most of these are likely agencies with revenues of over 1M and not representative of the marketplace for agencies under 1M in revenues.
Notably, the share of transactions involving one agency buying another is declining. Between 2015 and 2020, approximately one-quarter of transactions were between independent agencies. In 2021, that proportion was only 14.4%. Trem points to financial uncertainty resulting from the pandemic as the cause. The percentage of agencies acquired by other agencies are likely higher than the 14.4%, but most of the smaller deals are under the radar and don’t get included in these statistics.
Momentum appears to have carried over into the new year. During the first week of February 2022, Insurance Journal reported sales of agencies in California, Connecticut, Georgia, New York, Ohio, Tennessee and several other states. Menzer predicted that 2022 activity will remain rapid but likely less than in 2021. While rising interest rates may limit valuations, he sees the influx of private equity capital offsetting those pressures.
In addition, the threatened capital gains tax increase did not come to pass in 2021. Agency owners who may have felt some urgency to sell quickly and avoid higher taxes may now be inclined to hold out for better deals.
Still, the continued sizzling pace of the market is not guaranteed. If consumer inflation continues at its current rate or increases, resulting interest rate hikes may cool things off. The Federal Reserve has already announced plans to raise rates this year. Inflation pressures in turn may depend on whether supply chain disruptions can be reduced or eliminated. If goods begin flowing to ports more predictably, pricing pressures may ease.
For now, though, the M&A environment remains a sellers’ market. Any agency principals toying with selling may find that 2022 will be the year to do so.
