Rising interest rates impact insurance M&A activity
The current high interest rate environment forced some buyers to retreat. But there are reasons for optimism, OPTIS Partners says.
Insurance agency mergers and acquisitions during the first half of 2023 fell 24% from the same period in 2022, according to fresh reporting from OPTIS Partners.
“The drop-off in deal count continues as we move through 2023, which isn’t surprising anyone if for no other reason than the cost of capital has increased so much,” Steve Germundson, a partner at OPTIS Partners, an investment banking and financial consulting firm specializing in the insurance industry, said in a recent press release.
OPTIS Partners’ M&A database tracks deals in the U.S. and Canada. The report breaks down buyers into four groups: Private equity-backed/hybrid brokers, privately held brokers, publicly held brokers, and all others. The private equity-backed/hybrid group of buyers maintained their dominance in the buying spree with 69% of all transactions for the quarter, while transactions between private parties accounted for 22%. Publicly held brokers and all others accounted for just 9% of deals.
Here are some of other headlines from the firm’s Agent & Broker Merger & Acquisition Update for the first half of 2023:
- There were 359 announced insurance agency mergers and acquisitions in the first half of 2023, down 24% from 475 in the same period in 2022.
- It was the lowest first-half total since 2020 but nevertheless equal to the previous five-year average.
- There were 177 announced deals in Q2 2023. This is down from the 182 deals announced during Q1 2023.
“We’re seeing the effects of relative inactivity of some previously very active buyers,” said OPTIS Managing Partner Timothy J. Cunningham. “Yet others are successfully completing more deals.”
Among buyers, Hub International and BroadStreet Partners recorded the most transactions in H1 2023 with 29 and 26 deals, respectively. Inszone, World, and Patriot Growth followed with 22, 17, and 16 deals, respectively.
P&C sector performance
The report covers four types of sellers: agencies property-and-casualty insurance agencies, agencies offering both P&C and employee benefits, employee benefits agencies, and all other sellers (life/financial services, consulting and other businesses associated with insurance distribution).
P&C sellers accounted for 214 transactions (60% of the total). Benefits agencies sales totaled 45 (12%), and there were 47 sales of P&C/benefits agencies (13%). All other sellers accounted for 53 sales (15%).
The decline in deal count is somewhat broad-based, but OPTIS Partners says that the absence of previously active buyers skews the optics of this decline.
“The nine-quarter deal bubble that began in Q4 2020 is clearly in the rear-view mirror,” Germundson concluded. “But we’re continuing to see interest in the buy-side from a large number of firms, and there is evidence that valuations for better firms remain strong. If interest rates continue to rise as expected, there may be more buyers forced to the sidelines, creating opportunities for those with stronger balance sheets.”
Although rising interest rates undoubtedly impacted insurance M&A activity, the OPTIS Partners report says there are still many potential buyers who are well-positioned to complete transitions, as well as a larger number of baby boomer agency owners who are highly motivated to sell.
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