‘New Normal’ in Agency M&A Landscape Experts Share 2024 Outlook for Independent Agencies

The number of announced insurance distribution mergers and acquisitions boomed in 2021 and 2022. Last year, the count plummeted to levels seen at the beginning of the decade. Insurance Journal recently interviewed four M&A experts to share their analysis of the market — and how they foresee it evolving in the future.

‘New Normal’ in M&A

The insurance distribution mergers and acquisitions space may be settling into a “new normal” — or perhaps returning to an old one, according to OPTIS Partner’s latest North American Agent & Broker Year-End Merger & Acquisition Report.

The firm reports that announced deals reached 1,108 in 2021 and 1,031 in 2022. That number fell to 782 in 2023. Still, last year’s count was comparable to the 805 transactions made in 2020 and above all other years on record.

“As the economy appears to stabilize and perhaps the U.S. finds the soft landing the Fed is trying to achieve, we fully expect to see the pace of deal flow pick up where it left off in 2023,” the report said. “While some buyers will continue to slow their deal activity as they devote resources to integration or further digest the debt on their balance sheets, others are active if not more so than ever in a field of competition that has slightly fewer active players.”

During an interview in which he assessed the space, Steve Germundson, a partner at OPTIS, recalled how high demand and fear that capital gains tax rates could rise pushed folks to early exits during that bubble of heightened activity in 2021 and 2022. He said that today, the M&A marketplace is “largely healthy,” noting that while economic and logistical factors have slowed or stopped some buyers, “well-positioned, well-capitalized” buyers remain on the hunt.

“I think the key points out of that report and out of this discussion are pretty much the same,” Germundson said. “The M&A side of our business is not dead. It’s not even on life support. It’s healthy; it’s just come back to a normal level. I think we’re going to see the same in 2024. I think we’ll continue this sort of level of activity through the year.”

Activity was steady from quarter-to-quarter in 2023, he said, and comparing that to the years before the 25-month big wave of deals, “we’re up four, five, six percent over the prior average period of time,” he said.

Germundson also shared that some private agency owners are becoming more knowledgeable and skilled in purchasing agencies, and he expects to see more deals done between local agencies as we move ahead. “It’ll be a trend that I’m looking for in 2024 and beyond,” he said.

OPTIS data shows that of the 249 fewer deals done in 2023, perennial deal-count leaders Acrisure (71 fewer deals) and PCF (69 fewer deals) accounted for nearly 60% of the decline.

Hub International led buyers with 65 transactions in 2023, down 7% over its 2022 totals, yet 6% higher than its previous five-year average.

Broadstreet Partners followed with 59 completed transactions (up from 35 in 2022). Thirteen firms did 20 or more deals in 2023 compared to 17 the prior year.

Slight Uptick

In MarshBerry’s fourth quarter 2023 Retail M&A Market Update, the consulting agency reported that while last year may not have broken records, it was still a “solid year for insurance brokerage M&A.”

Phil Trem, president — Financial Advisory, MarshBerry, highlighted in an interview that 2023 was the third-highest year of announced deals in history.

Announced acquisitions dropped 16.8% year-over-year by MarshBerry’s count, which the company attributed to debt markets becoming more restrictive and putting a crunch on capacity for buyers.

Also, seller supply was low, and unlike previous year-ends, when firms were compelled to sell due to fears of pending tax or regulatory changes, 2023 offered “no compelling reason or urgency for firms to sell,” the report said.

That may change moving forward.

“We think, at least over the next 24 months, 2024 (and) 2025, that we are going to see another slight uptick,” Trem said. “We could see levels that we saw in 2020 (and) 2021, predominantly because of some uncertainty with what’s coming in this year’s election and what’s potentially going to happen as it relates to taxes.”

A package of tax cuts passed by former President Trump in 2017 expires at the end of 2025, Trem explained, meaning some of those revisions will revert in 2026. There is some concern, he said, that depending on who wins the White House and Congress, capital gain taxes could potentially be at risk of increasing down the road.

“So, when you step back and you’re a business owner, an entrepreneur, and you’re thinking about the future of your company, if you think it might be a foregone conclusion that you will sell your business in the next three, four, five-plus years, even though you may not theoretically be ready to do it today, the risk of paying higher taxes is going to be a catalyst for more sellers to come to the table in 2024 and 2025.”

Trem recalled how in 2021, President Biden expressed a desire to raise capital gains rates, “and there was a scramble” to complete transactions — including transactions by businesses that “likely wouldn’t have considered a transaction but for fear of a higher tax rate.”

In its report, MarshBerry said that while the overall M&A deal count has decreased in the past two years, “we continue to see a rise in valuations driven by the need for expertise at high performing platform organizations.”

Diversified Appeal

Like the other experts interviewed for this piece, Catherine Oak recognized that insurance M&A activity has taken off since around 2008. She said in the last couple of years, “it’s just gone crazy,” while acknowledging 2023’s dropoff.

“Now, there’s a little bit of a slowing now because of interest rates, and also because a lot of the good firms are already acquired,” Oak said, noting that some national and regional brokers are now purchasing inspection firms, title companies and other non-insurance entities. “Because there aren’t those good size, medium-to-large insurance agents left to acquire,” Oak said.

Oak is the founder of Oak & Associates and has worked as a management and financial consultant since 1984. She said that today, any viable agent “can still sell and probably has many suitors,” regardless of size. She believes what matters most is that they are profitable and growing.

“And if they’re not, it’s not that they can’t get a good price for their agency, but they’re not going to get those high multiples,” Oak explained.

“They’re not going to get three times revenue or 12-times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). But they might still get acquired. It’s just that a lot of these independent agents, they want those big bucks.”

It’s her job as a consultant to help them meet their goals. In addition to growth, she looks to see if they have at least a 30% pro forma profit and are compensating producers equitably. Buyers don’t want firms to be overstaffed or books of business specialized in one area, she said.

“So, if the agency has personal lines, commercial lines, writes employee benefits, maybe some life insurance — that’s better,” Oak shared. “That they’re more diversified, and then those clients can then be cross-sold, so the average size of account is bigger instead of just a lot of monoline business. And then, when people have more than one policy, they often don’t shop it as often and leave if you’re taking care of a client and all the client’s needs.”

Oak and Bill Schoeffler, her partner at Oak & Associates, reported in a December column that prices paid by publicly traded brokers, large regionals and agencies funded by private equity firms are still high.

“They will hopefully continue to be high for the valuable, desirable firms,” the pair wrote. “Since the supply is dwindling, the prices may be even higher for those that remain if they fit the profiles of the key buyers today. As long as insurance agencies remain profitable, there will be buyers.”

Best-in-Class Agencies

Sean Kenny, senior vice president of corporate development at SIAA, saw economic factors and geopolitical concerns contribute to last year’s transaction drop, but he’s also seen multiples retain their value, staying “extremely strong and resilient” for top agencies, he said.

“For the best agencies out there, they’re still commanding the highest multiples that we saw at the peak in 2021,” Kenny explained. “Now, there is a big, clear separation between the best agencies and those average- to below-average agencies.”

He explained in a follow-up email that he defines high- performing agencies as those experiencing strong new business growth supported by solid retention. They embrace change, adopt technology and have a consistent supply of newly minted producers and account executives that are trained and mentored by other successful teammates and leadership on staff. They also consistently reinvest in their businesses and figure out how to maximize the value provided to the customer through diversified revenue streams.

Low performers likely have very few of the above results and characteristics, Kenny wrote.

A low-performing agency is “likely flat and supported by rate tailwinds rather than new business growth,” and “does not embrace technology and therefore has difficulty measuring the results of their team,” Kenny shared, adding that there’s no reinvestment or little support provided to help the agency’s sales staff grow.

Too heavy a reliance on one key member in the organization — often the owner — can also result in the agency being in a tough spot when it comes to succession planning, he explained.

Kenny said he has seen a “significant decline in valuations” for average- to below-average agencies.

He expects the consolidation trend that has taken place over the past decade or so will continue, but that the number of transactions will be “less pronounced.” Only about 10% of independent agencies generate more than $2.5 million in revenue, making it more difficult for billion-dollar brokers to “move the needle through inorganic growth going forward,” he said.

Still, demand is there, and Kenny believes M&As could pick up steam if a recession is dodged and inflation is controlled. He often fields questions related to timing exits, and his advice is always the same. Instead of aiming to time the market, Kenny urged agents to focus on improving their businesses.

“It’s a little bit of the wrong question,” he said, “because you’re trying to time the market, versus what you should be thinking about is your business and how to provide the best offering to your customers. How am I going to deliver the most value to my customers?”

He continued: “How am I going to differentiate my offering from my competitors? How am I going to set up my business for success regardless of whether I’m here on a day-to-day basis or I’m not?”

Topics Mergers & Acquisitions Trends Agencies