Employee Benefits Firms Still in Demand
But business is evolving, which may affect deal flow.
The employee benefits (EB) and consulting industry continues to change, forcing organizations to bolster their expertise, client service delivery, and resources to help clients achieve their benefits goals.
This includes sharing cost-containment strategies, delivering human-resources services, managing compliance, and quickly adapting to constant shifts in client needs. That requires investment in resources. EB valuations have increased, driving a large amount of consolidation within the space.
A total of 173 deals were announced in 2023 within the EB segment of the insurance distribution landscape, representing 21.4% of all acquisitions for the year. This is a respectable number considering the dramatic shift in the capital markets due to increasing interest rates and other macroeconomic headwinds. While 2023 employee benefits M&A activity was down from 2021 and 2022 (193 and 213 reported EB deals, respectively), the increased interest in the segment over historical numbers continued. From 2019 to 2023, there were 887 announced transactions involving EB and consulting firms. That is a 64.7% increase from 538 reported deals in the prior five-year period, 2014-2018.
Employee benefits transactions and overall acquired EB revenue can also fall into the “multiline” category in most deal-tracking classifications.
Several transactions in 2023 involved large multiline brokerages, most of which have sizable employee benefits revenue. If you include all employee benefits firms and multiline firms with employee benefits revenue, total year-over-year deal count dropped by 13% (431 to 376).
The year also saw a narrowed focus from historical leaders in acquisition of EB consulting firms, signaling more selectivity in the broader buyer landscape. As the capital markets tightened and several firms faced increased costs and more restrictions on their use of capital, a few historically active EB buyers limited their activity in 2023. For example, Alera Group went from 14 deals in 2022 to four deals in 2023, and BroadStreet Partners dropped from seven deals in 2022 to three in 2023. While there was sufficient demand to fulfill supply, if this trend continues in 2024, firms could experience a narrowed buyer pool and limitations on post-close flexibility.
Nonetheless, the year ended with a bang via the announcement that Aon, the second-largest brokerage in the United States, would buy NFP, the 13th-largest U.S. brokerage. The deal is set to close in the middle of 2025. Both Aon and NFP are large national multiline brokerages with sizeable EB businesses.
Four companies completed 10 or more acquisitions of employee benefits and consulting firms during 2023:
1) Simplicity Group (13 of 13 total transactions) has increased its acquisitions in the EB and consulting space every year since entering the market in 2019.
2) Hub International (15 of 39 total transactions) has boosted its buys of EB firms from only five in 2020.
3) Hilb Group (12 of 24 total transactions) had its highest EB deal count to date, compared to the previous high of eight in 2021.
4) Integrity Marketing (32 of 32 total transactions) continues to rapidly acquire firms in the EB and consulting space.
Notable Transactions
May 30: Gallagher announced its acquisition of Bernard Benefits, a technology-enabled employee benefits firm headquartered in Nashville, Tennessee.
Oct. 12: Patriot Growth Insurance Services, a national private-equity backed firm, announced its acquisition of Two Twelve Benefits, an EB firm headquartered in Jacksonville, Florida.
Oct. 17: Alera Group, a private-equity backed national insurance and wealth services firm, announced its acquisition of Brio Benefits Consulting, a leading employee benefits and wealth advisory firm in New York City.
Dec. 6: IMA Financial Group, a PE-backed national brokerage, announced its acquisition of EBS Insurance Brokerage, an EB-focused firm headquartered in Newton, Massachusetts.
Will EB Interest Continue in 2024?
The shortest-term risk for active EB acquirers revolves around lack of quality and scaled supply, as consolidation reduces the number of larger firms.
The industry still lacks leadership that is committed to driving change, investing against current margins, hiring the next generation, creating sustainable sales production, and instilling confidence in competing with the bigger, more scalable players. Large EB-only brokerages have become a minority. The employee benefits business is evolving, and clients rely on the brokerage more than ever as competition continues to drive scalable innovation.
Looking further into 2024, the sense in the industry is that deal activity in this space will remain active. But as the high interest rate environment continues to look unfavorable, and the 2024 U.S. presidential election looms, valuations and deal counts are likely to change.
