The slowdown in insurance agency mergers and acquisitions activity continued in the first half of 2024. A recent report from OPTIS Partners showed that the number of announced deals fell 26% from both the level in the first half of 2023 and the five-year average.
Those numbers, however, do not tell the whole story. Here are eight things agency principals should keep in mind as they consider their businesses’ futures.
Deal volume remains above pre-pandemic levels. There were 739 transactions in the 12 months ending June 30, 2024. There were fewer than 700 transactions during the same period in 2019. While the volume is below the peak of 1,200 in the first half of 2022, buyers are still more aggressive than they were before the COVID-19 pandemic disruption.
Specialists and high performing agencies are still in demand. Global law firm Norton Rose Fulbright predicted in April that buyers’ interest will remain high in agencies with specialized underwriting expertise, market knowledge, effective use of data and technology, high margins, and recurring revenue. Industry experts say that agencies that have specific market niches command higher valuation multiples.
The big players are still looking for good small agencies. In a May report, S&P Global quoted the chief executive officer of one large insurance brokerage as seeing significant buying opportunities among smaller firms. He stated that acquiring family-owned agencies with less than $25 million in revenue “can create value for their clients and create clear opportunities for their employees …” Acquiring these agencies also gives these large firms a presence in more diverse areas, including rural areas with low traffic density and better auto insurance results.
Private equity backed brokerages are doing most of the buying, and they want property-casualty agencies. Private equity has accounted for as much as 80% of the deals in each quarter since 2017. Through April, these firms accounted for 142 of the 197 announced transactions this year. The agencies they bought were either P&C focused or full service agencies – three quarters of reported transactions fell into these two categories.
Agency valuation multiples are holding up. Multiples hit a peak in the summer of 2022 before the Fed started hiking interest rates. They have slid since then, but rebounded slightly in the second quarter of 2024. A July report from global investment bank Houlihan Lokey, Inc. forecasted high valuation multiples in 2024 and 2025.
Activity may accelerate in the second half of the year. Assured Partners, one of the more active purchasers in recent years, reported that one of its largest trading partners received record numbers of submissions in April and May. At the same time, rates for Representations and Warranties Insurance (RWI) are unusually low. RWI coverage guarantees the representations a seller makes in an M&A deal. With excess capacity in the market, agency sellers will find this coverage affordable and easy to get. This may facilitate a higher rate of M&A deals.
U.S. economic growth has been unexpectedly fast. The economy grew at a faster-than-expected rate of 2.8% in the second quarter of the year. A strong economy makes prospective buyers more willing to take risks on other businesses.
Interest rates on loans may finally start decreasing. Indications are that the inflation rate may be stabilizing close to the Federal Reserve’s target rate of 2% annually. This has led some observers to predict that the Fed will begin cutting interest rates in September. If that happens, borrowing costs for agency purchasers should eventually decline, giving a boost to the M&A market.
The headlines may say that the M&A market is in the doldrums, but the truth is that it has stabilized and may be poised for heightened activity. Agency owners who have held off on selling may want to rethink their positions and prepare their businesses to attract enthusiastic buyers.
