Industry the May 2023 issue

For Potential Sellers, What Matters Most Is Growth

With the cost of capital increasing, buyers are getting more selective.
By Phil Trem Posted on April 30, 2023

Even as the Federal Reserve continued to push the agenda with another 0.25% increase to the federal funds rate in March, there is no clear sign that inflation, hiring trends or the financial markets intend to brake.

Even the collapse of Silicon Valley Bank and Signature Bank in early March seems to be receding from investor memories more quickly than anticipated, with the major U.S. stock markets ending the first quarter of 2023 in positive territory. At the close of March, the S&P 500 rose 7%, the Nasdaq was up nearly 17%, and the Dow Jones finished just above water at 0.4% for the quarter.

Nice Start for Insurance M&A

As of March 31, 2023, there have been 98 announced insurance distribution merger and acquisition transactions in the United States this year—a 7% increase in total deals compared to this time in 2022, which ended its first quarter with 91 transactions.

Private-capital backed buyers accounted for 73 of the 98 transactions (74.5%) through March, which is consistent with their proportion of announced transactions over the last five years. The total number of deals by these buyers has increased at a compound annual growth rate of 26.9% since 2018. The number of announced transactions by independent agencies has continued to decline since 2021. On average, 23.1% of deals were done by independent agencies from 2018 to 2021, compared to 12.6% in 2022 and 12.2% to start 2023. High valuations and availability of capital could be two of the main drivers for this buyer segment’s decline in deal activity.

Strong deal activity from the marketplace’s most active acquirers has remained constant to begin 2023. Ten buyers accounted for 51% of all announced transactions observed, while the top three accounted for 21.4% of the 98 total transactions.

A Plateau for Valuations?

The insurance distribution industry seems to take the economic environment with a grain of salt, understanding that, at the end of the day, everyone still needs insurance. That’s not to say this industry is immune to the impact of economic factors or that they are ignored. It’s just that adjustments can be made and the insurance brokerage industry has a long history of resiliency. One of those adjustments may be a nascent plateau in valuations for average firms.

Buyers are looking at potential targets that they believe can make them better and help give them a competitive advantage. Proven growth is still the biggest differentiator for buyers, and they are looking for agencies that already have the right tools and capabilities but need a partner to help them grow even more.

Because of this adjustment in the mindset of buyers, the valuations for premium quality firms are higher than they’ve ever been while valuations for average firms are starting to plateau or even decline.

While MarshBerry remains cautiously optimistic that this will be another strong year for M&A activity, the industry will continue to watch the economic conditions unfold in 2023 and make adjustments as needed.

Phil Trem President of Financial Advisory, MarshBerry Read More

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